3 Stocks From the Prospering Air Conditioner & Heating Industry
The Zacks Building Products - Air Conditioner & Heating industry players are uniquely positioned to capitalize on the mega-trends and opportunities associated with the energy transition and the pro-environmental drive. The companies continue to experience growing demand for renewable generation and solutions in 2023 and beyond, creating significant growth opportunities. Although supply-chain disruptions and inflationary pressures have been creating hurdles for the industry players, companies like Comfort Systems USA, Inc. FIX, AAON, Inc. AAON and Tecogen Inc. TGEN have been gaining from maintenance, 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 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 the Air Conditioner & Heating Industry
U.S. Administration’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 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 U.S. administration. Meanwhile, the companies have been benefiting from an improvement in the residential and 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 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 in the expansion of distribution, research and development projects, and marketing programs are contributing significantly to the companies’ top lines. The players are also actively pursuing accretive acquisitions to broaden their product portfolios and expand their geographic footprints, as well as market share. Meanwhile, services associated with maintaining, monitoring and repairing the existing equipment are providing 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.
Supply-Chain Woes, Rising Costs, Regulations: Although supply-chain issues have somewhat eased in recent times, the same, along with rising raw material costs, have been causes of concern, hurting the profit margins of industry participants. Operating expenses of companies are rising due to the pandemic-led business challenges and sharp rises in variable operating expenses, including company-wide, performance-based compensation, and excessive logistics and freight costs. Meanwhile, the industry is 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 impacts of seasonality on the industry’s revenues are significant risks.
Zacks Industry Rank Indicates Bright 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 #5, which places it in the top 2% 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 bright 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 top 50% of the Zacks-ranked industries is a result of the positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually gaining confidence in this group’s earnings growth potential. Since June 2023, the industry’s earnings estimates for 2023 have increased to $4.85 per share from $4.58.
Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.
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 gained 33.5% compared with the broader sector’s 26.9% rise. Meanwhile, the Zacks S&P 500 composite has gained 6% during the period.
One-Year Price Performance
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 28.1X versus the S&P 500’s 19X and the sector’s 14.8.
Over the past five years, the industry has traded as high as 40.2X, as low as 19.9X and at a median of 25.9X, as the chart below shows.
Industry’s P/E Ratio (Forward 12-Month) Versus S&P 500
3 Air Conditioner and Heating Stocks to Buy Now
Below, we have discussed three stocks from the Zacks Air Conditioner & Heating universe with solid growth potential. The chosen companies currently sport a Zacks Rank #1 (Strong Buy) or 2 (Buy).
Comfort Systems: Based in Houston, TX, the company is a national provider of comprehensive heating, ventilation and air conditioning installation, along with maintenance, repair and replacement services. The company’s mechanical operations and electrical segment have been performing well, benefiting from continued growth and solid performance in its modular business. 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 expanded its scale, increased recurring service revenues, and enhanced expertise in complex markets, including industrial, technology and life sciences.
Comfort Systems currently sports a Zacks Rank #1, which has gained 72.2% over the past year. The company is expected to witness 44.1% earnings growth in 2023. FIX has seen an upward estimate revision for 2023 earnings to $7.62 per share from $7.17 over the past 30 days. You can see the complete list of today’s Zacks #1 Rank stocks here.
Price and Consensus: FIX
AAON: 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. Moderating cost inflation and solid pricing have been aiding the company to deliver solid results.
AAON currently carries a Zacks Rank #2. The stock has gained 54.7% over the past year. AAON has seen an upward estimate revision for 2023 earnings to $2.05 per share from $1.89 over the past 30 days. The company’s earnings for 2023 are expected to grow 65.3%.
Price and Consensus: AAON
Tecogen: This Waltham, MA-based company is one of the leading manufacturers of clean energy products. Higher sales wing to the company’s strategic focus on key market segments such as controlled environment agriculture, healthcare and multifamily have been driving growth. TGEN’s chiller product, in particular, has seen significant penetration in the cannabis cultivation space. More than 45% of the company’s backlog is in this high-growth market.
TGEN, which currently carries a Zacks Rank #2, has lost 5.8% over the past year but gained 14% over the past six months. Also, TGEN has seen an upward estimate revision for 2023 earnings over the past 30 days.
Price and Consensus: TGEN
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Comfort Systems USA, Inc. (FIX) : Free Stock Analysis Report
AAON, Inc. (AAON) : Free Stock Analysis Report
Tecogen Inc. (TGEN) : Free Stock Analysis Report
