HVAC Market Update and Outlook
Pure-play Manufacturers, Service, and Distribution Outperform S&P 500
Within the HVAC universe, pure-play manufacturers, which include AAON Inc., Lennox Intl., Mestek Inc., and Nortek Inc., have led the market since January 2012 with a cumulative return of 173 percent. Diversified HVAC manufacturers and HVAC service and distribution stocks have also performed well, gaining 67 percent and 62 percent, respectively, outperforming the S&P 500 with a gain of 56 percent over the same period.
In late January, two of the industry’s larger players announced small acquisitions. Johnson Controls Inc. announced an acquisition of a 26 percent stake in Hitachi Home and Life Solutions (India) Limited for approximately $94 million. Daikin Industries announced it had agreed to acquire the refrigerant and pharma propellants business from Solvay SA, a Brussels-based chemical and plastic business, for approximately $26 million.
Valuations of HVAC stocks finished mixed in 2014 in terms of earnings multiples. Total enterprise value as a multiple of Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) trended up quarter over quarter in all three comparable company groups. Median price to earnings multiples for the three subsets also all trended up quarter over quarter with diversified and pure-play HVAC manufacturers finishing slightly down from the first quarter of the year and HVAC service and distribution players besting their first-quarter median multiple.
AHR Expo Takeaways
The Raymond James HVAC coverage team recently attended the 2015 AHR Expo winter conference in Chicago. The conference is a place for HVAC industry professionals to gather under one roof to exhibit and discuss innovations and trends that are shaping the future. Smarter devices, greater comfort, superior efficiency, and the best value for the customer are the name of the game for 2015. Key takeaways include:
• Smart buildings and efficiency dominate the agenda of owners and tenants who are now focused on Leadership in Energy and Environmental Design (LEED) certification and saving money (i.e. “Smart and Sustainable”). Smart home is not the only opportunity here as this trend is likely to play out in industrial and commercial settings, as well.
• A number of exhibitors demonstrated truly innovative technology:
• Carrier introduced a water-cooled chiller to achieve excellent efficiency under a variety of operating conditions;
• Daikin exhibited the Internet of Things (IoT) with building owners in mind in order to more easily monitor operations and keep an eye on expenses;
• The Honeywell Lyric Thermostat has a sensor that knows not only when users are in the house, but also as they approach the easy-to-use programming interface;
• Munters’ new ClimaFlex AHU in the air-handler family of products is designed to efficiently work to provide dehumidification, heat recovery, and a variety of customizable air-treatment options;
• Pro1 introduced a thermostat that enables private labeling for installers. What better than your customers knowing exactly who to call for service when they check the thermostat? Customers also have the ability to receive real-time alerts if the temperature reaches levels outside preset zones;
• Dolphin WaterCare is a relatively small and growing company that has a unique, elegantly simple, and chemical-free water treatment solution that utilizes proven pulse power technology to provide world-class control of scale, corrosion, and biological activity. Dolphin’s process apparently has a one-year payback and favorable environmental impact and improves the overall health of the HVAC system at the same time;
• Trade-Serve offers software for service techs to improve employee training and overall operating efficiency through field empowerment. Think Salesforce for field techs and an overall integrated approach for pricing and higher customer loyalty.
• Focus on niche markets appears vogue in data centers, dehumidification, make-up air, cold-storage applications, lodging, and energy-recovery ventilators (ERVs);
• Dehumidification has particular prevalent advantages in areas such as cold storage rooms, art galleries, power stations, precision chemical plants, etc.;
• Go green to save green;
• Changing regulations: New minimum standards went into effect Jan. 1;
• The overall new trend is empowerment and selling skills for technicians who have to be generalists in the field;
• As homes become more complicated and connected, users will likely need to rely more on HVAC service techs and house calls to keep everything connected (water heaters, thermostats, security cameras, door bells, locks, lighting, etc.). This is no longer just a job for the audio-video technician; and
• Push notifications and early alert indicators are coming with connected appliances and devices within the home.
Earnings Season Takeaways
As the publicly traded HVAC companies report earnings, both results and the general outlook for the industry remain positive.
“Looking at 2015, we continue to expect revenue, margin, and profit to be up,” said Todd Bluedorn, CEO, Lennox Intl. “We’ve established new records for earnings per share, net income, operating profit, operating margins, and sales. Interesting enough, we did that in 2014, even after we made substantial investments in our business. For example, we added more products, launched new technologies, opened new locations, and added more than 200 employees, or about 5 percent more, to our organization,” said Albert Nahmad, chairman and CEO, Watsco Inc.
“Trane’s commercial HVAC fourth-quarter revenues were up mid-single digits. Commercial HVAC equipment revenues were up low single digits, while HVAC parts, services, and solutions revenue were up high single digits versus the prior year,” said Susan Carter, CFO, Ingersoll Rand.
Information courtesy of Raymond James & Associates. The company actively covers the HVAC sector through its General Industrial Investment Banking Group. The firm recently advised ABB/Thomas & Betts on the sale of its Reznor HVAC business to Nortek. For more information, please contact Frank McGrew at 615-665-3626 or Michael Stockburger at 901-579-2705.
Publication date: 5/11/2015