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Zacks Industry Outlook Highlights Watsco, Comfort systems and AAON

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For Immediate Release

Chicago, IL – September 1, 2022 – Today, Zacks Equity Research discusses Watsco, Inc. (WSO - Free Report) , Comfort Systems USA, Inc. (FIX - Free Report) and AAON, Inc. (AAON - Free Report) .

Industry: HVAC

Link: https://www.zacks.com/stock/news/1974429/5-dividend-growth-stocks-to-beat-september-slump?art_rec=home-home-investment_ideas_stocks-ID02-txt-1974429

The Zacks Building Products - Air Conditioner & Heating industry has been grappling with supply-chain disruptions and inflationary pressures. Nonetheless, industry players like Watsco, Inc. , Comfort Systems USA, Inc. and AAON, Inc. have been leveraging from maintaining, monitoring and repairing services along with prudent cost-management practices. Also, the replacement of older systems to reduce electricity consumption and carbon footprint, as well as planned investments in technologies to capture more growth, is acting as a major tailwind for the industry participants.

Industry Description

The Zacks Building Products - Air Conditioner & Heating industry comprises designers, manufacturers, and marketers of a broad range of products for heating, ventilation, air conditioning, and refrigeration markets. The products include rooftop units, chillers, air-handling units, condensing units and coils.

The industry players also supply thermostats, insulation materials, refrigerants, grills, registers, sheet metal, tools, concrete pads, tape and adhesives. Air conditioning and heating equipment are sold in residential replacement, commercial and industrial HVAC (heating, ventilation and air conditioning) as well as residential new construction markets.

3 Trends Shaping the Future of Air Conditioner & Heating Industry

Supply-Chain Woes, Rising Costs, Regulations: Supply-chain disruptions and rising raw material costs have been hurting the profit margins of the industry participants. Supply-chain constraints remain a key issue, resulting in inefficiencies and larger inventory. Operating expenses of companies are rising thanks to pandemic-related business challenges and sharp rises in variable operating expenses, including company-wide, performance-based compensation, excessive logistics and freight costs.

Meanwhile, the industry is also susceptible to stringent governmental regulations on energy efficiency and gas emissions. HVAC systems use refrigerants for cooling, which is harmful to humans and the environment. Also, stiff competition and the impact of seasonality on the industry's revenues are significant risks.

Biden's Pro-Environmental Moves: Reducing greenhouse gas emissions for a cleaner environmental footprint has been a major focus of the U.S. administration. Many industry participants remain engaged in supporting industries and facilities by selling and maintaining clean and efficient energy systems to reach their environmental goals for carbon reduction, while providing resiliency to grid outages.

The companies are also gaining from the fast-growing controlled environment agriculture industry, courtesy of their consistent supply of clean cooling solutions. Overall, the companies are well positioned to gain from the renewable energy drive of the pro-environmental Biden administration. Meanwhile, the companies have also been benefiting from an improvement in the non-residential market along with a rise in repair and remodeling activities.

Technology Augmentation & Inorganic Moves: Persistent investments in technologies designed to revolutionize customer experience seem to be vital for the industry. Digitization of the companies' marketplace via e-commerce and iOS/Android-enabled apps, supported by a comprehensive database of product information, continues to see strong momentum.

Importantly, new investments for the expansion of distribution footprint, research and development projects as well as marketing programs are contributing significantly to the companies' top lines. The companies are also actively pursuing accretive acquisitions to broaden their product portfolio and expand their geographic footprint as well as market share.

Meanwhile, services associated with maintaining, monitoring and repairing the existing equipment are also providing the industry participants with stable revenue sources. The industry generates a major share of revenues from these services, which consumers generally cannot suspend even when the construction market fluctuates.

Zacks Industry Rank Indicates Dull Prospects

The Zacks Building Products - Air Conditioner & Heating industry is a six-stock group within the broader Zacks Construction sector. The industry currently carries a Zacks Industry Rank #162, which places it in the bottom 36% of more than 250 Zacks industries.

The group's Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bleak near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.

The industry's positioning in the bottom 50% of the Zacks-ranked industries is a result of tepid earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group's earnings growth potential. Since May 2022, the industry's earnings estimates for 2022 have decreased 3.6%.

Despite the industry's blurred near-term view, we will discuss a few stocks that one may consider adding to the portfolio. Before that, it's worth taking a look at the industry's shareholder returns and current valuation.

Industry Outperforms S&P 500, Sector

The Zacks Air Conditioner & Heating industry has outperformed the broader Zacks Construction sector and Zacks S&P 500 composite over the past year.

Over this period, the industry has lost 12% versus the broader sector's 17.8% decline. Meanwhile, the Zacks S&P 500 composite has slipped 12.3% during the period.

Industry's Current Valuation

On the basis of the forward 12-month price to earnings, which is a commonly used multiple for valuing Air Conditioner and Heating stocks, the industry is currently trading at 23.9X versus the S&P 500's 17.4X and the sector's 11.5X.

Over the past five years, the industry has traded as high as 39.9X, as low as 19.4X and at a median of 24.6X.

3 Air Conditioner and Heating Stocks to Watch

Below, we have discussed three stocks from the Zacks Air Conditioner & Heating universe that have solid growth potential. The chosen companies currently carry a Zacks Rank #3 (Hold). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.

Comfort Systems USA.: Based in Houston, TX, this company is a national provider of comprehensive heating, ventilation, and air conditioning installation along with maintenance, repair, and replacement services. A solid backlog level and substantial ongoing investments in training, productivity, and technology are expected to drive growth. Overall positive trends — primarily in industrial, technology, and manufacturing markets served by the company — as well as accretive buyouts are encouraging. The acquisitions have enhanced its scale, increased recurring service revenues, and lifted expertise in complex markets, including industrial, technology and life sciences.

Comfort Systems, which currently carries a Zacks Rank #3, has gained 33.5% over the past year. The company is expected to witness 23.4% earnings growth in 2022 and 21.9% in 2023.

AAON, Inc.: Based in Tulsa, OK, AAON engineers, manufactures and markets air conditioning as well as heating equipment. The company maintains a balance between new construction and replacement applications and is making the most of robust replacement demand, broadly across the non-residential building market. Despite inflationary cost pressures, the BasX acquisition, which was closed in December 2021, has been delivering solid results for AAON. While supply-chain issues and inflation caused similar issues, BasX has been flexible in adapting to challenges.

AAON, which currently carries a Zacks Rank #3, has lost 14.3% over the past year. Earnings are expected to grow 37.9% in 2022 and 59.4% in 2023.

Watsco: Headquartered in Miami, FL, Watsco distributes air conditioning, heating, and refrigeration equipment along with related parts in the United States, Canada, Mexico and Puerto Rico. The company has been benefiting from an improvement in the e-commerce business, strong performance across geographies and product categories backed by solid unit growth, higher selling prices, a richer mix of high-efficiency systems, and technology-driven gains in market share. Also, increased focus on accretive acquisitions and enhancing shareholder value bodes well.

This Zacks Rank #3 company's earnings are expected to grow 34.8% in 2022. WSO has lost 1.1% over the past year. Yet, Watsco has seen an upward estimate revision of 0.5% for the 2022 bottom line over the past 60 days.

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