The HVAC space has stayed pretty hot in 2021 despite robust valuations, as the major players in the U.S. market, excluding Daikin (OTCPK:DKILY) have continued to outperform the broader industrial sector. Although the companies have been relatively careful with guidance and the sell-side continues to fret about a potential slowdown in the residential space, investors seem quite willing to pay rich multiples for growth rates that are admittedly, for now, well above what other sectors are offering.
Since my last update on the company in the fall of 2020, Lennox Intl (LII) shares have underperformed the broader industrial sector and most of its HVAC peers (except Daikin), though they’re still up about 15%. That could make some sense in the context of Lennox’s greater reliance on U.S. residential demand and less leverage to commercial HVAC in general and OUS HVAC in particular.
I still have trouble reconciling the multiples in the HVAC space today, and Lennox is no exception. Although I have pretty bullish growth expectations (relative, at least, to the sell-side), I can’t see a path to better than mid-single-digit long-term annualized returns from here, and that’s not attractive enough for me.
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