These 3 actions benefit from red megatrends

The heating, ventilation and air conditioning (HVAC) industry has several exciting long-term trends behind it. Thus, the main players like Carrier (NYSE: CARR), Trane Technologies (NYSE: TT), and Johnson Controls (NYSE: JCI)will benefit. It may not seem like the sexiest industry to invest in, but who cares? Sometimes it’s the growth industries under the radar that generate the best returns. Here’s why these HVAC stocks are destined for substantial growth for many years to come.

Image source: Getty Images.

Main growth trends

Growth catalysts fall into three categories:

  • Long-term end-market megatrends including urbanization, rising urban temperatures and the emergence of the middle class in developing countries requiring CVC.
  • Increasingly stringent regulatory requirements and the need to reduce carbon emissions will push customers to higher quality HVAC suppliers like Carrier, Trane (Trane, American Standard) and Johnson Controls (York).
  • The growth of connected Internet of Things (IoT) devices and digitization will shift demand towards major players deploying digital tools.

In addition to these trends, the post-pandemic environment is likely to create an increased awareness of the need for healthier, cleaner buildings – something that begins with the “V” in HVAC.

Megatrends

It is no coincidence that the three companies have been restructured in recent years. The tailwinds behind these industrial companies are so strong that all three companies have been significantly restructured to focus on investment in recent years. For example, Carrier was previously part of a much larger company, United Technologies, which split in 2020.

The split allowed Carrier’s management to focus on significantly reducing costs and seeking to increase market share through targeted initiatives such as revenue growth in emerging markets and the development of its service revenue. through its digital initiatives – we’ll talk about that later.

Trane Technologies was previously part of Ingersoll Rand until the latter merged its industrial activities with Gardner Denver to create the new company Ingersoll Rand, leaving the climate segment under the name Trane.

Skyscrapers.

Image source: Getty Images.

Johnson Controls was also a much larger company a few years ago. However, its car seats business Adienne was split in 2016 and sold its power solutions business (automotive batteries) in 2019. Here again, the main idea is to focus on its core business of growth, HVAC and its complementary solutions for heating systems. building (fire and security).

Regulatory requirements and reduction of carbon emissions

Given that buildings are responsible for 40% of the world’s greenhouse gas emissions, it’s clear that HVAC providers have a key role to play in helping businesses reduce their carbon footprint. In fact, at a recent Morgan Stanley conference, Trane CEO Mike Lamach said that “a quarter of global emissions occur from HVAC systems in buildings and through loss of food and drink. the cold chain ”, and he believes that figure will rise to 35% by 2030.

Lamach considers HVAC systems to be responsible for “40% to 60% of the energy used in the building”. Carrier, Trane and Johnson Controls own major refrigerated transport companies that can help reduce food waste.

Meanwhile, Johnson Controls CEO George Oliver believes his company has the potential to benefit from the hundreds of billions of investments needed in commercial buildings for companies to meet their goal of net zero carbon emissions.

Digitization and IoT

The solution to help businesses meet regulatory requirements and Meeting the demand for HVAC comes from the more efficient pump and refrigerant technology offered by these three companies. But it also comes from the growing use of digital applications in connected buildings.

Using digital technology, such as OpenBlue solutions from Johnson Controls, building owners can use artificial intelligence to improve a building’s performance and better predict maintenance needs.

Cloud in the shape of a brain sending signals to power plants.

Image source: Getty Images.

It’s a win-win scenario for building owners and high-quality HVAC providers. Homeowners get more efficient buildings and HVAC companies can sell value-added digital solutions. Additionally, the addition of digital technology will create more loyal customers and improve connection rates, leading to improved long-term service revenues – a key goal for Carrier.

As such, digitization will improve revenue growth and profit margins for key CVC players.

Evaluation matters

Growth prospects are not lost on Wall Street analysts, and the consensus is for mid single-digit revenue growth for all three for the foreseeable future. Based on analyst consensus on free cash flow, Johnson Controls and Carrier currently appear to be good value.

Graph between price and free cash flow showing the expected downward trends for the three companies.

Data source: marketscreener.com. Chart by author.

Overall, the HVAC industry offers a compelling combination of long-term revenue growth and margin expansion. There is a definite need to provide CVC and ensure it meets carbon emission targets while adding value through digital technology. This environment should favor Carrier, Trane and Johnson Controls for many years to come.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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