Writing about Trane (NYSE:TT) back in early April, I said that this leading HVAC-R company needed to post a couple of beat-and-raise quarters to rebuild investor sentiment and get the shares outperforming again versus the broader industrial sector. The company did just that, and the shares have responded – beating the sector by about 10 points since my last update (and the S&P 500 by about six points), and stretching the year-to-date outperformance to around 15% versus the broader industrial sector.
It’s not easy to find obvious bargains in the HVAC-R sector given investor enthusiasm for the near-term growth in residential demand and transportation, recovering demand in commercial, and longer-term opportunities in greener buildings and indoor air quality. I did highlight one such opportunity, Daikin (OTCPK:DKILY), back in mid-June, but those shares have since shot up.
Specific to Trane, I can’t say the shares are cheap on either a DCF or relative valuation basis. At best, I can say that the company’s premium on 2022 EBITDA (trading at around 2.5x higher than the group (17.5x)) can maybe be justified with a roughly in-line operating margin and superior revenue growth outlook in a market that richly rewards growth.
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