3 Stocks to Watch From the Thriving 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 Watsco, Inc. WSO, The AZEK Company Inc. AZEK and AAON, Inc. AAON 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 five-stock group within the broader Zacks Construction sector. The industry currently carries a Zacks Industry Rank #32, which places it in the top 13% 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 September 2023, the industry’s earnings estimates for 2023 have increased to $4.64 per share from $4.61.
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 45.7% compared with the broader sector’s 22.6% rise. Meanwhile, the Zacks S&P 500 composite has gained 10.9% 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 17.2X versus the S&P 500’s 18X and the sector’s 12.8.
Over the past five years, the industry has traded as high as 40.2X, as low as 17.2X and at a median of 25.5X, as the chart below shows.
Industry’s P/E Ratio (Forward 12-Month) Versus S&P 500
3 Air Conditioner and Heating Stocks to Watch
Below, we have discussed three stocks from the Zacks Air Conditioner & Heating universe with 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.
Watsco: Based in Miami, FL, Watsco is the largest distributor of Heating, ventilation and air conditioning equipment, as well as related parts and supplies (HVAC/R) in North America. The company has been gaining strength from its continuous investment in industry-leading technologies, accretive acquisitions and a consistent focus on rewarding customers. The solid performance of HVAC equipment and commercial refrigeration product segments added to the company’s uptrend.
WSO stock has gained 33% over the past year. Also, 2023 and 2024 earnings estimates have increased to $14.14 and $14.92 per share from $14.05 and $14.80, respectively, over the past 30 days. It carries an impressive VGM Score of A, making it a potentially interesting investment opportunity. WSO surpassed earnings estimates in three of the trailing four quarters and missed on another occasion, with the average surprise being 5.7%.
Price and Consensus: WSO
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 stock has gained 30.1% over the past year. The company’s earnings for 2023 are expected to grow 65.3%. It carries an impressive VGM Score of B. AAON surpassed earnings estimates in all the trailing four quarters, with the average surprise being 24.8%.
Price and Consensus: AAON
The AZEK Company: Headquartered in Chicago, IL, this company manufactures low-maintenance and environmentally-sustainable outdoor living products — including TimberTech decking and Versatex and AZEK Trim — for residential, commercial, and industrial markets. Strong end-market demand is driven by repair & remodel market strength, sustained interest in outdoor living, and an accelerated trend in material conversion to the company’s various long-lasting, high-performance products. The company has been experiencing ongoing success by effectively implementing strategies for growth and productivity, achieving strong operational performance, and achieving double-digit growth in residential sales. Their primary focus is on expanding their business through the introduction of new products, converting materials, and expanding their customer base. In addition, they are working to increase profit margins by excelling in operations, saving on sourcing costs, and implementing recycling initiatives. AZEK is also progressing well in the decking capacity expansion program.
AZEK stock has gained 52.1% over the past year. AZEK has seen an upward estimate revision of 3% for fiscal 2023 earnings over the past 30 days to 68 cents per share. It carries an impressive VGM Score of A. AZEK surpassed earnings estimates in three of the trailing four quarters and missed on another occasion, with the average surprise being 14.1%.
Price and Consensus: AZEK
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