The U.S. economy is in bad shape. The pandemic caused GDP to plunge 33% in the second quarter and 13.6 million people unemployed as of August, according to Statista.
As the fall approaches, hopes of reviving the economy depend in part on more people — e.g., students, teachers, and staff in schools and patrons in restaurants and bars — being inside as the weather gets unpleasant.
But people being inside together could send Covid-19 case counts back up.
To get more people inside without reviving the pandemic, masks and social distancing are critical elements — while hopes remain high that an effective Covid-19 vaccine will be discovered and adopted world wide.
So are heating, ventilation and air conditioning (HVAC) products that refresh and filter indoor air rapidly. Such HVAC products from Carrier
Should you buy stock in these publicly-traded companies? Of the three, Carrier looks like the strongest bet now.
HVAC Industry’s Mixed Outlook
The HVAC industry is growing thanks to big construction projects planned around the world. That demand has been stifled somewhat as Covid-19 has stopped work on projects that were underway before the pandemic hit.
The HVAC industry is anticipated to grow at a 4.8% compound annual rate from $240.8 billion in 2019 to $358.1 billion in 2013, according to P&S Intelligence, abetted by growth in construction spending worldwide — in China, the U.S., India, Saudi Arabia, the U.A.E., and Qatar — from $11 trillion in 2017 to $13.5 trillion by 2024.
Covid-19 is holding back growth in the HVAC market. Global lockdowns have halted HVAC equipment manufacturing and supply, bleak economic prospects drove buyers to refrain from non-essential purchases, and infrastructure projects “have been thrown off schedule, due to reduced funding and laborers heading back home,” according to P&S Intelligence.
Three major HVAC suppliers remain optimistic despite these industry challenges.
Johnson Controls Sees Many Reasons For Optimism
JCI’s financial report for the quarter ending June 2020 was not great. Its revenue was down 16% and adjusted earnings before interest and taxes fell 11% to $707 million.
JCI’s outlook for the second half of 2020 is less pessimistic. As CEO George Oliver said in the July 31 earnings call, “Given the trends in Q3, we expect to see a nice sequential improvement in revenue, which is expected to result in a year-over-year organic revenue decline in the high-single to low double-digit range” compared to an earlier forecast of 15% to 20% revenue decline.
JCI sees many reasons for optimism among its business customers. As David Budzinski, Vice President, Global Products Commercial, Johnson Controls
JCI is also enjoying demand growth among consumers due to global warming and Covid-19. JCI is seeing “an unprecedented uptick in retail demand.” There’s more heat in the south and southeastern U.S. and there has been “a phenomenal uptick in incoming [Japanese] order volumes in July and August. In addition, as people spend more time in their homes they want to upgrade their systems to get cleaner air, explained Budzinski.
It’s not all milk and cookies for JCI. As he explained, commercial office vacancies — think restaurants, light-commercial buildings, and even some universities — are still high. While commercial HVAC quotes are up over 30%, “project awards are just not coming through at the rates we traditionally saw them.”
JCI expects the effects of the pandemic — most notably a desire for cleaner indoor air — to linger long into the future. As he said, “Greater than 50% [of residential customers] are looking for a higher Minimum Efficiency Reporting Values (MERV) rating of filtration to filter out micro-organisms, viruses, and dust.” JCI’s new product development group is putting a higher priority on “themes such as healthy buildings, clean air, and touchless or frictionless environments,” Budzinski concluded.
Carrier Sees June Uptick In Demand Less Pessimistic Outlook
Carrier’s results for the second quarter of 2020 were not as bad as expected. Nevertheless Carrier’s revenue fell 20% to almost $4 billion while adjusted operating profit declined 42% to $442 million from the year before
As David Gitlin, Carrier Global CEO said in a July 31 earnings conference call, “The second quarter was better than we expected, driven by our continued cost reduction actions, progress on our top line initiatives and improvement in the U.S. in June.”
Carrier was also more optimistic about the quarter ending September 30. “We are raising the low end of our prior outlook for sales, adjusted operating profit and cash flow enabling us to add back some targeted growth investments that we had previously scaled back,” according to Gitlin.
Carrier’s HVAC revenue decline was less severe than the fall in its corporate revenue. HVAC sales fell 15% — offset somewhat in the U.S. by “a substantial pickup in June. We exited the quarter with a backlog about twice last year’s level and inventories in the field down about 25%. The commercial HVAC business was down 17% [and light commercial dropped around 20%],” CFO Timothy McLevish said in the earnings conference call.
Like JCI, Carrier is optimistic about the future for its HVAC business. That’s due to a key trend “around healthy, safe and sustainable buildings. We feel confident in our medium-term outlook of mid-single-digit sales growth, high single-digit EPS growth and cash flow equal to net income,” said Gitlin.
Demand for cleaner indoor air has enabled Carrier to win orders for its air scrubber machine, the OptiClean HEPA filter. As Gitlin told investors, “We’ve seen very solid order activity whether it’s a dentist office or K through 12, we’ve seen very strong demand there. We’ve installed chillers and some of the building operators have come back and said, ‘Can I upgrade the filtration system?”
Carrier says it’s uniquely well-positioned to offer its HVAC, controls, fire and security products in a “One-Stop-Shop.” For example, Carrier can give a restaurant “a red, yellow, green on all aspects of the healthy and safe indoor environment,” said Gitlin.
Trane’s Revenues And Operating Income Drop With Outlook Uncertain
Trane’s revenues and profits fell in the quarter ending June 2020. Its revenues were down 13% to $3.1 billion while operating income dropped 25% to $424 million.
Trane did not offer guidance for the third quarter. According to its earnings announcement, “Given the current uncertainty created by the Covid-19 pandemic and its impact on the Company’s end markets, the Company has not reinstated financial guidance for 2020. The Company intends to reevaluate guidance on its third quarter earnings call.”
Trane is investing in innovation seeking to satisfy the growing demand for “safer and more resilient communities.”
A Trane spokesperson told me September 3 that “a global team of experts from the company’s commercial and residential HVAC and transport refrigeration businesses will [work in Trane’s Center for Healthy and Efficient Spaces (CHES) to] evaluate and scale the latest advancements in indoor environments across Trane’s transport, homes, and commercial buildings customer base.”
What HVAC Investments Look Most Promising?
Carrier — formerly part of United Technologies
JCI stock is flat for the year — though it has risen 77% from its pandemic low in March to $41.67 as of last Friday. Its shares trade at a lofty P/E of 41.
Trane’s shares have performed less impressively. Since the beginning of the year, they’ve lost 13% of their value. Yet Trance stock has popped 64% since its March 23 low to trade at $117 on September 11 — sporting a P/E of nearly 30.
Carrier looks like the best value of the bunch.