According to a 2018 report from the International Energy Agency, the number of air conditioning units in the world is expected to rise from 1.6 billion units to 5.6 billion by the time 2050 rolls around. That's an estimated 250% increase per year.
With average global temperatures on the rise, more and more people are finding air conditioning to be a necessity. Although warmer regions such as Asia, the Middle East and the Americas already have AC units installed in most homes and businesses, only 5% of European homes have AC, which is why the heat waves this past summer caused so much distress. Temperatures hit 108 degrees Fahrenheit in Paris and 102.2 in London, shattering record highs - and most of the people in those cities had to beat the heat without air conditioning.
Thus, companies that produce HVAC units are in a good position for growth due to the increasing demand for their products, especially in developed European countries that previously had no need for them and developing regions with warmer climates.
One of the world's largest producers of HVAC units is Tokyo-based Daikin Industries (TSE:6367), the owner of the Goodman Manufacturing brand.
The company has a market cap of 4.25 trillion yen ($39 billion), a price-earnings ratio of 22.1, a price-sales ratio of 1.7 and an operating margin of 11.28%. According to the Peter Lynch chart, the stock is trading at roughly the same level as its intrinsic value.
The company has an attractive balance sheet, an interest coverage ratio of 23.31 and an Altman-Z score of 3.9. GuruFocus has assigned it a financial strength score of 7 out of 10 and a profitability score of 8 out of 10.
Analysts expect the company's earnings per share to increase 3.54% and its revenue to increase 5.19% by 2020. The growth potential, combined with strong fundamentals and increasing product demand, makes this company a strong candidate for stock price growth.
In terms of marketing to regions with the most growth potential for HVAC companies, Lennox International Inc. (NYSE:LII) may have an edge over its competitors. The company has established a strong presence in Europe, the Middle East and Africa.
Lennox has a market cap of $9.71 billion, a price-earnings ratio of 27.91, a price-sales of 2.7 and an operating margin of 12.42%. The company has been able to consistently increase its revenue and net income since 2012, as shown in the chart below.
The company has an interest coverage ratio of 12.81 and a cash-to-debt ratio of 0.02, meaning it does have a significant amount of debt, though its Altman-Z score of 5.86 puts it out of the danger zone for potential bankruptcy. It has a GuruFocus financial strength score of 4 out of 10 and a profitability score of 9 out of 10.
In terms of growth, Lennox has a three-year dividend growth rate of 20.8% to a current dividend yield of 1.13%, and a three-year average share buyback rate of 3.7%. Analysts predict that the company's revenue will decrease by 1.8% in 2020 and increase by 5.8% in 2021. Indeed, as shown in the Peter Lynch chart below, Lennox's stock is currently trading above what its earnings are worth. All things considered, this stock may not be a good buy now, but it is worth keeping an eye on to potentially buy on the rebound in a year or so.
United Technologies Corp. (NYSE:UTX) is a company that does a lot of things, from aerospace and defense to HVAC and elevators and beyond. It it's the owner of the Carrier brand, which produces building automation, security, refrigeration systems and HVAC.
Unlike with Lennox and Daikin, HVAC does not form the core of United Technologies' profits. This company derives the majority of its income from aerospace and defense. It has a market cap of $119.25 billion, a price-earnings ratio of 22.53, a price-sales ratio of 1.61 and an operating margin of 11.55%.
Although United Technologies itself is a strong company, what is important here is that it plans to spin off Carrier as its own company sometime in 2020. Since Carrier is one of the world's leading producers of HVAC systems, a spinoff holds promising potential in terms of growth within the industry. Spinoffs are often successful due to a sudden increase in their ability to self-manage instead of being accountable to a larger organization that does not specialize in their products.
Disclosure: Author owns no shares in any of the stocks mentioned.
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This article first appeared on GuruFocus.