Chicago, IL – May 2, 2022 – Today, Zacks Equity Research discusses Watsco, Inc. WSO, Comfort Systems USA, Inc. FIX, AAON, Inc. AAON as well as Tecogen Inc. TGEN.
Industry: Heating & Air Conditioning
Link: https://www.zacks.com/commentary/1910170/4-top-air-conditioner-heating-stocks-to-buy-in-a-prospering-industry
A major boost in residential and non-residential markets should continue to drive the Zacks Building Products - Air Conditioner & Heating industry. Additionally, maintaining, monitoring, and repairing services along with prudent cost-management practices — which have been leveraging technologies — should lend support to Watsco, Inc., Comfort Systems USA, Inc., AAON, Inc. as well as Tecogen Inc.
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.
Solid Residential & Non-Residential Markets: The industry participants have been gaining strength from an uptick in demand. The strong momentum of the U.S. housing market, backed by the rising need for more work-at-home space, and solid recovery in the non-residential market have been benefiting the industry participants. Also, the industry stands to benefit from a substantial rise in repair and remodeling activities.
Biden'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 also 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 Biden administration.
Technology Augmentation & Inorganic Moves: Persistent investments in technologies designed to revolutionize customer experience seem to be 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 for 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 to broaden their product portfolio and expand their geographic footprint as well as market share.
Meanwhile, services associated with maintaining, monitoring and repairing the existing equipment are also providing the industry participants with a stable source of revenues. The industry generates a major share of revenues from these services, which consumers generally cannot suspend even when the construction market fluctuates.
Rising Costs, Tariffs, Competition: Rising raw material costs due to trade restrictions have been hurting profit margins to some extent. Also, stiff competition and the impact of seasonality on the industry's revenues are significant risks.
The industry is also 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. Most importantly, supply chain disruptions due to the impact of the coronavirus pandemic across the United States are a major headwind.
The Zacks Building Products - Air Conditioner & Heating industry is a six-stock group within the broader Zacks Construction sector. The industry currently carries a Zacks Industry Rank #27, which places it in the top 11% 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 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 January 2022, the industry's earnings estimates for 2022 have increased 9.6%.
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.
The Zacks Air Conditioner & Heating industry has lagged the broader Zacks Construction sector and Zacks S&P 500 composite over the past year.
Over this period, the industry has lost 20.5% versus the broader sector's 16.6% decline. Meanwhile, the Zacks S&P 500 composite has slipped 1.2% during the period.
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 22.9X versus the S&P 500's 17.9X and the sector's 11.4X.
Over the past five years, the industry has traded as high as 39.9X, as low as 19.4X and at a median of 24.6X.
We have selected four stocks in the Zacks Air Conditioner & Heating universe that currently carry a Zacks Rank #2 (Buy) and have solid prospects. You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.
Watsco: Headquartered in Miami, FL, Watsco distributes air conditioning, heating, and refrigeration equipment along with related parts in the United States, Canada, Mexico and Puerto Rico. The company has been benefiting from an improvement in the e-commerce business, strong performance across geographies and product categories backed by solid unit growth, higher selling prices, a richer mix of high-efficiency systems, and technology-driven gains in market share. Also, increased focus on accretive acquisitions and enhancing shareholder value bodes well.
This Zacks Rank #2 company's earnings are expected to grow 27% in 2022. WSO has lost 5.5% over the past year. Yet, Watsco has seen an upward estimate revision of 12.8% for the 2022 bottom line over the past 60 days.
Comfort Systems USA, Inc.: Based in Houston, TX, this company is a national provider of comprehensive heating, ventilation, and air conditioning installation along with maintenance, repair, and replacement services. A solid backlog level and substantial ongoing investments in training, productivity, and technology are expected to drive growth.
Overall positive trends — primarily in industrial, technology, and manufacturing markets served by the company — as well as accretive buyouts are encouraging. The acquisitions have enhanced its scale, increased recurring service revenues, and lifted expertise in complex markets including industrial, technology and life sciences.
Comfort Systems, which currently carries a Zacks Rank #2, has gained 3.5% over the past year. The company is expected to witness 23.2% earnings growth in 2022. FIX has seen a 7.3% upward estimate revision for 2022 earnings over the past 60 days.
AAON, Inc.: 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. Overall, higher revenues, improved productivity, lower SG&A expenses (as a percentage of sales) along with a lower tax rate bode well for AAON despite inflationary cost pressures.
AAON, which currently flaunts a Zacks Rank #2, has lost 27.5% over the past year. Yet, AAON has seen a 2.4% upward estimate revision for 2022 earnings over the past 60 days. Earnings are expected to grow 44.8% for 2022.
Tecogen: This Waltham, MA-based company is one of the leading manufacturers of clean energy products. Higher sales wing to the company's strategic focus on key market segments such as controlled environment agriculture, healthcare and multifamily have been driving growth. TGEN's chiller product, in particular, has seen significant penetration in the cannabis cultivation space. More than 45% of the company's backlog is in this high-growth market.
TGEN, which currently flaunts a Zacks Rank #2, has lost 17.6% over the past year. Yet, TGEN has seen an upward estimate revision for 2022 earnings over the past 60 days.
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Watsco, Inc. (WSO) : Free Stock Analysis Report
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