Daikin's Reinvestment Plans Have Undermined Near-Term Growth And Sentiment

 

It may take money to make money, but that doesn’t mean that the Street is happy to hear it when company managements choose to reinvest in product R&D and sales channel development. That is precisely what Daikin Industries (OTCPK:DKILY) (6367.T) is doing, as the company aims to take more share in the U.S. market, but the end result is an earnings outlook around 7% to 10% lower than previously expected over the next few years.

Although I thought it was a little pricey (as were/are most HVAC companies), I liked Daikin back in October of 2020 and the shares did outperform peers like Carrier (CARR), Lennox (LII), and Trane (TT) until around mid-February, when the company began talking down numbers. All told, the shares are still up some from that last update, but well short of what its HVAC peers have done over that time.

The valuation looks interesting here on a long-term basis, but the prospect of iffy margin leverage over the next few years isn’t great for sentiment, nor is the likelihood that the company’s efforts to reinvest in the business, continue to pay a dividend, and pursue around $6B of M&A will lead to more leverage. Patient investors should take a look, but softer near-term results are a real risk.

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Daikin's Reinvestment Plans Have Undermined Near-Term Growth And Sentiment