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Solid Growth Prospects for Air Conditioner and Heating Industry

Zacks Equity Research

The Zacks Building Products - Air Conditioner & Heating industry comprises designers, manufacturers and marketers of a broad range of products for the 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 is sold to residential replacement, the commercial and industrial HVAC (Heating, Ventilation and Air Conditioning) and residential new construction markets.

Let’s take a look at the industry’s three major themes:

  • Though the residential construction market slowdown in the United States has made the operating backdrop a bit difficult for the industry players, the companies are registering higher demand courtesy of a rise in disposable and per capita income, lower unemployment rate and improving consumer confidence. Higher construction spending activity in non-residential, commercial and industrial sectors is a boon to the Air Conditioner & Heating industry, boosting companies’ revenues and profits.
  • Along with accelerated construction spending in the United States, continued investments in technologies designed to revolutionize customer-experience seem to be vital growth catalysts to the industry. Digitization of the companies’ marketplace via e-commerce and iOS/Android-enabled apps, supported by the industry’s comprehensive database of product information, continues to see momentum. Importantly, new investments in 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 in order to broaden their product portfolio and expand geographic footprint as well as market share. Meanwhile, services associated with maintaining, monitoring and repairing existing equipment are also providing the industry participants a stable source of revenues. Notably, the industry generates a major share of its revenues from these services, which consumers generally cannot suspend even when the construction markets fluctuate.
  • On the flip side, rising raw material costs due to tariffs and trade restrictions have been hurting profit margins to some extent. Also, rising freight expenses, stiff competition and the impact of seasonality on the industry’s revenues could pose significant challenges in the forthcoming quarters. Again, the industry is susceptible to heavy governmental regulation related to energy efficiency and gas emission. HVAC systems use refrigerant for cooling that is harmful to humans and the environment.

Zacks Industry Rank Indicates Favorable Outlook

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 #25, which places it at the top 10% 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 impressive near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

The industry’s position in the top 10% of the Zacks-ranked industries is a result of positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts have faith in this group’s earnings growth potential. The industry’s earnings estimate for the current year has been increased by 1% since Nov 2018.

Before we present a few stocks that you may want to consider, let’s take a look at the industry’s recent stock-market performance and valuation picture.

Industry Outperforms S&P 500 and Sector

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

The industry has gained 4.1% over this period compared with the S&P 500’s increase of 0.9%. The broader sector has declined 16% in the said time frame.

One-Year Price Performance

Industry’s Current Valuation

On the basis of forward 12-month price-to-earnings ratio, which is a commonly used multiple for valuing Air Conditioner and Heating stocks, the industry is currently trading at 21.5X versus the S&P 500’s 16.7X and the sector’s 13X.

Over the past five years, the industry has traded as high as 27.6X, as low as 13.5X and at the median of 22.7X, as the chart below shows.

Industry’s P/E Ratio (Forward 12-Month) Versus S&P 500


Bottom Line

A major boost in infrastructural and construction spending should continue to favor the industry’s performance. Additionally, maintaining, monitoring and repairing services along with prudent cost-management practices leveraging technology should provide support. The aforementioned growth factors seem to be offsetting headwinds arising from rising costs, heavy governmental regulation and competitive pressure.

Currently, there is only one stock that is cashing in on the positive economic fundamentals and is witnessing positive earnings estimate revisions. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Comfort Systems USA, Inc. (FIX): Earnings estimates for this Houston, TX-based leading provider of mechanical services — including heating, ventilation, air conditioning, plumbing, piping and controls — have exhibited an uptrend over the past 60 days. The consensus EPS estimate for this Zacks Rank #1 stock has increased 3.3% for 2019, over the period.

Price and Consensus: FIX

Investors may hold on to the following stocks, which currently carry a Zacks Rank #3 (Hold) and have solid earnings growth prospects.

Tecogen Inc. (TGEN): Headquartered in Waltham, MA, this company designs, manufactures and sells industrial and commercial cogeneration systems that produce combinations of electricity, hot water and air conditioning. It has an expected earnings growth rate of 375% for 2019.

Price and Consensus: TGEN

AAON, Inc. (AAON): This Tulsa, OK-based manufacturer of air-conditioning and heating equipment has an expected earnings growth rate of 58% for 2019.

Price and Consensus: AAON

Lennox International Inc. (LII): This headquartered in Richardson, TX-based provider of climate control solutions on an international scale has expected earnings growth of 31% for 2019. The Zacks Consensus Estimate for 2019 has improved 1.7% over the last 60 days.

Price and Consensus: LII


Zacks' Top 10 Stocks for 2019

In addition to the stocks discussed above, wouldn't you like to know about our 10 finest buy-and-holds for the year?

From more than 4,000 companies covered by the Zacks Rank, these 10 were picked by a process that consistently beats the market. Even during 2018 while the market dropped -5.2%, our Top 10s were up well into double-digits. And during bullish 2012 – 2017, they soared far above the market's +126.3%, reaching +181.9%.

This year, the portfolio features a player that thrives on volatility, an AI comer, and a dynamic tech company that helps doctors deliver better patient outcomes at lower costs.

See Stocks Today >>

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Tecogen Inc. (TGEN) : Free Stock Analysis Report
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AAON, Inc. (AAON) : Free Stock Analysis Report
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