Daikin Industries: Window Of Opportunity Closed Quickly, But Business Performing Well

 

I liked Daikin (OTCPK:DKILY) (6367.T) on a relative valuation basis back in June as a way of playing a generally expensive HVAC-R sector, but I didn’t expect a better than one-third return in under three months, and investors definitely liked the strong fiscal first quarter results from Daikin. Looking at a longer-term basis, though, Daikin has been less impressive since my October 2020 write-up, having outperformed the S&P 500, the wider industrial sector, and Lennox (LII), but lagging Carrier (CARR), Johnson Controls (JCI), and Trane (TT) on what I believe is a perceived lack of equivalent leverage to green commercial HVAC demand.

I no longer see Daikin as especially undervalued, but I do still like it on more of a “first among equals” basis, as I think the market still underestimates the company’s leverage to green retrofits in Europe and the U.S., as well as potential share gains/margin leverage in the U.S. residential business, and potentially more leverage to its internal R&D efforts.

 

Read more here: 

Daikin Industries: Window Of Opportunity Closed Quickly, But Business Performing Well

Trane Seeing All The Demand It Can Handle, If Not More

 

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.

 

Continue reading here: 

Trane Seeing All The Demand It Can Handle, If Not More

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.

Read the full article here: 

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

Daikin's Global HVAC Franchise Is One To Watch

Most readers are going to be at least passingly familiar with major HVAC companies like Carrier (CARR), Lennox (LII), and Trane (TT), but Daikin (OTCPK:DKILY) (6367.T) is likely less familiar, even though it is the leading HVAC company in the world by a healthy margin and one of the largest players in the U.S. (through the Goodman brand, mostly). While Daikin has the favorable exposure to strong residential activity in the U.S. and green building retrofits in the U.S. and Europe, there’s also an above-average growth angle here from Daikin’s large exposure to growing Asian markets, including, but not limited to, China.

There really aren’t any “cheap” HVAC stocks in my opinion (though Johnson Controls (JCI) is looking a bit more interesting), but I think Daikin is priced reasonably enough relative to its growth prospects to be worth considering. With what I expect will be mid-single-digit revenue growth and high single-digit FCF growth, as well as healthy margins, I see high single-digit total annualized return potential.

I also want to note that the U.S. ADRs are pretty liquid, with a 90-day average daily volume of over 76,000 shares.

 

Read the full article here: 

Daikin's Global HVAC Franchise Is One To Watch