One financial expert has let investors know that a number of heating, ventilation, and air conditioning (HVAC) companies are entering a golden age of returns and earnings. Specifically, JP Morgan’s top sector analyst went on to pick a handful of companies he thinks as being the cream of the crop.
JP Morgan analyst Stephen Tusa wrote a lengthy report on Monday where he outlined a number of recommendations for investors.
Although he did cut his rating for one HVAC stock, Lennox International (NYSE: LII), down from a “neutral” to a “sell,” he went on to say that the sector overall is in an excellent situation both when looking at past performance, current valuation metrics, as well as the ongoing trend in the market.
HVAC “fundamentals are in the midst of a golden era,” wrote Tusa in a 300-page-plus research report. “Where not only is demand solid, but supply is rational.” Part of the reason why demand is so strong now is that ten years ago during the financial crisis, demand for HVAC services fell significantly as consumers deferred repairs. The recovery of the real estate sector has led to strong growth in the HVAC market that’s expected to continue well into next year.
Tusa also expects that there could be a spike in M&A activity in the HVAC industry, especially as a number of his recommendations trade at attractive valuation multiples.
Specifically, the JP Morgan analyst recommends United Technologies (NYSE: UTX), Emerson Electric (NYSE: EMR), and Ingersoll-Rand (NYSE: IR). All three of those companies he gives a “buy” rating on, expecting shares between the three to rise by around 8 percent from current levels in the months to come. Currently, all three of those companies are trading a modest, 16 times estimated 2020 earnings.
Even looking at over the past year, HVAC stocks have been doing extremely well. The air-conditioning sector in particular returned approximately 12 percent year to date, with over the past five years have seen 30 percent yearly returns on average.
Neither of the three companies Tusa recommended responded much to the news, with all three either rising or falling by around one percent. What has been positive, however, is that all three HVAC companies have been surging over the past six months, with only Emerson Electric seeing a 15 percent dive in the stock price in May, although the company shows signs of recovering.
United Technologies Company Profile
United Technologies is a diversified industrial company currently operating four segments. These include Pratt & Whitney (commercial and military aerospace), Collins Aerospace Systems (aerospace systems), Otis (elevators and escalators), and Carrier (HVAC, refrigeration, and fire and security).
UTC completed the acquisition of Rockwell Collins in November 2018, creating one of the aerospace industry’s largest installed bases. In November 2018, the company announced its intent to split its aerospace and commercial platforms.
UTC will remain an aerospace company and will retain both Pratt & Whitney, which is most known for its flagship geared turbofan engine, and Collins Aerospace Systems. UTC will also spin off both Otis and Carrier sometime during the front half of 2020. – Warrior Trading News
