With climate change heating up the world, it may surprise investors to see the stocks of companies providing heating, ventilation and air conditioning (HVAC) systems suffering alongside the rest of the market.
The bearishness comes from a mix of worries about consumer spending power in light of inflation, the slowdown in housing markets worldwide and the increase in the cost of materials (which could pressure margins). The slowdown in housing markets is particularly worrisome, since the housing collapse during the Great Recession caused HVAC sales to drop three years in a row.
However, HVAC sales have proven mostly steady and resilient over time, with the notable exception of the 2008 recession.
According to estimates from Grand View Research, the global HVAC market is expected to grow at a compound annual rate of 6.3% through 2030. Markets like Europe and China, which have historically had lower adoption of HVAC systems due to better natural climates, will likely see especially high growth. Another major growth driver is the availability of smart features and more energy efficient systems, which are strong incentives for homeowners to upgrade their systems.
To take advantage of expected growth in the HVAC market, investors may want to consider Watsco Inc. (WSO, Financial), Carrier Global Corp. (CARR, Financial) and Daikin Industries Ltd. (DKILY, Financial) as these companies have top-tier brand names and appear undervalued.
Watsco
Founded 60 years ago as a maker of parts, components and tools for the HVAC industry, Watsco (WSO, Financial) has grown into the largest distributor of HVAC equipment and related parts in the Americas, primarily the U.S., Canada, Latin American and the Caribbean.
Selling new AC units is part of its business nowadays, but Watsco is still focused on other aspects of the HVAC market, with 85% of its sales coming from repairs and replacement parts. Therefore, Watsco will be less vulnerable to any downturns in the housing market.
Since it is nearly impossible to trade down for HVAC parts and repairs require a trained technician, Watsco benefits from a high barrier to entry in its market.
As of July 11, shares of Watsco traded around $252.78 for a market cap of $9.85 billion and a price-earnings ratio of 20.86. The company has a financial strength rating of 7 out of 10 and a profitability rating of 9 out of 10. The GF Value chart rates the stock as modestly undervalued.
Watsco also offers a dividend yield of 3.18%, which could make it more attractive for income investors or those who want a little extra income to make up for future market volatility. The payout ratio is a little high at 63%, but it is below the company’s historical median payout ratio.
Carrier Global
Carrier Global (CARR, Financial) was spun off from United Technologies in early 2020. The American multinational home appliance company operates in three segments: HVAC, Refrigeration and Fire & Security. Nearly 60% of Carrier’s sales come from the U.S. region, but about 20% come from Europe, with the rest in the Asia Pacific and Other regions.
While most of its revenue comes from the U.S., Carrier does have sizeable exposure to Europe. Only about 20% of European households have AC units installed (compared to 85% of U.S. households) because the weather in the region has historically been too mild to need it. That is changing, though. Due go climate change, heat waves have given Europe a nasty shock the past couple of years, which will likely lead to an uptick in AC installations.
Carrier is also one of the most well-known HVAC brands in the world. That global recognition for providing high-quality products goes a long way toward providing a moat for the company.
Shares of Carrier traded around $36.53 on July 11 for a market cap of $30.99 billion and a price-earnings ratio of 12.13. The stock has not been around long enough to calculate the GF Value, but according to the Peter Lynch chart, Carrier is trading below both the Peter Lynch earnings line and its historical median valuation.
Carrier’s dividend sits at 1.56%, which is not great but is better than no dividend. The payout ratio is only 17%.
Daikin Industries
Daikin Industries (DKILY, Financial), also known as Daikin Global, is a Japanese provider of HVAC solutions for residential, commercial and industrial customers. It operates a truly global business; the highest percentages of its sales are in Japan, the Americas, China and Europe and the “Rest of Asia,” Middle East, Oceania and Africa regions also contribute materially to the top line.
While most U.S. and Japanese households already have some form of AC installed, the same cannot be said for the rest of the regions in which Daikin operates. The company’s highest-growth regions as of fiscal 2021 were the Middle East, Africa, Europe and China, with the Americas also seeing significant growth.
Known for customer satisfaction, high quality and efficiency, Daikin sells a wide range of air conditioning and heating products for homeowners and businesses. Its whole-house systems are more applicable for mature markets, while its single-zone and multi-zone ductless solutions are ideal for growing markets that lack the ductwork necessary for central AC.
On July 11, shares of Daikin traded around $16 for a market cap of $46.83 billion and a price-earnings ratio of 29.07. The GF Value chart rates the stock as modestly undervalued.
The dividend yield is low at 1%, which is only somewhat mitigated by the three-year dividend growth rate of 7.7%, though the stock could make up for this in capital gains thanks to its exposure to growth markets. The payout ratio is 25%.
