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Tuesday, October 20, 2020

Lennox's Strong Performance Smacks Into High Expectations

If these early reports and reactions are any indication, it's going to be an interesting earnings season. Sandvik (OTCPK:SDVKY) reports pretty lackluster results in its SMS division and the market responds with "don't worry, you'll get 'em next time!" and Lennox (LII) has a very strong quarter and the market responds with "yeah … I dunno."

Now, to be fair, not only are the addressed markets very different but so too are also the valuations, with HVAC companies like Lennox trading at quite high multiples going into the quarter. Still, I think the market is likely overestimating the risk to continued residential HVAC growth in 2021 (and beyond) while still being a bit too casual about the risk of weaker commercial new-builds (offset, though, by opportunities in energy efficiency and air quality retrofits).

I thought Lennox was pricey after second quarter results, and with the shares having largely tracked the industrial sector since then (dipping below with the post-earnings sell-off), I don't feel any different. I appreciate the strengths and appeal of the HVAC market, but not at these multiples and I'd still prefer Daikin (OTCPK:DKILY) in the HVAC space.


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Lennox's Strong Performance Smacks Into High Expectations

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