Carrier Global Corporation (CARR) and Lennox International Inc. (LII) are two prominent providers of heating, ventilation, and air conditioning (HVAC) systems. CARR provides HVAC, refrigeration, fire, security, and building automation technologies worldwide. It serves residential and commercial customers. In comparison, LII designs, manufactures, and markets a range of products internationally for the HVAC and refrigeration markets. It operates through three segments: Residential Heating & Cooling; Commercial Heating & Cooling; and Refrigeration.
Continued adoption of hybrid working and resumption of industrial activities have been driving the demand for HVAC products and solutions. Moreover, industries are increasingly using efficient HVAC systems to achieve their ESG goals. Rising demand and considerable investments in this industry have incentivized companies to manufacture automated and sustainable HVAC systems that consume low energy and reduce carbon emissions. The global HVAC market is expected to grow at a 4.4% CAGR to reach $198.10 billion by 2026. Therefore, both CARR and LII should benefit.
CARR is a winner with 20.9% gains versus LII’s negative returns over the past year. But which of these stocks is a better pick now? Let’s find out.
Latest Developments
On February 17, 2022, CARR launched Carrier Ventures — a global venture capital group focused on accelerating sustainable innovation and disruptive building and cold chain technology. Carrier Ventures aims to engage in deep collaboration and strategic partnerships with its initial inaugural investments in AddVolt and OhmConnect – high-growth organizations committed to reducing global emissions from refrigerated transport and homes. This is expected to help companies bring new technologies to the market, reduce carbon footprints and gain wide reach in the future.
On June 9, 2021, LII introduced the rooftop unit Ultimate Indoor Air Quality system as part of its Building Better Air initiative, which helps commercial businesses improve the health of their building and remove 99% of the coronavirus. Using a factory-installed combination of MERV 16 filters and UVC Germicidal lamp, this system has been third-party tested to show a 95% single-pass efficiency rate with a 70% virus reduction rate after five minutes4 and 99% reduction after 30 minutes. LII should gain widespread recognition across the industry in the coming months.
Recent Financial Results
CARR’s net sales for its fiscal 2021 fourth quarter ended December 31, 2021, increased 11.7% year-over-year to $5.13 billion. The company’s net sales from the HVAC segment came in at $2.73 billion, indicating a 16.9% year-over-year improvement. Its adjusted operating profit came in at $517 million, up 14.1% from the prior-year period. While its adjusted net income increased 38.9% year-over-year to $389 million, its adjusted EPS grew 41.9% to $0.44. As of December 31, 2021, the company had $2.99 billion in cash and cash equivalents.
For its fiscal 2021 fourth quarter ended December 31, 2021, LII’s net sales increased 5.6% year-over-year to $964.80 million. However, the company’s gross profit came in at $253.60 million, representing a 7.9% decline from the prior-year period. Its operating income came in at $97.60 million, down 29.8% from the year-ago period. LII’s non-GAAP net income came in at $86.70 million, indicating a 22.2% year-over-year decline. Its non-GAAP EPS decreased 18.7% year-over-year at $2.35. The company had $31 million in cash and cash equivalents as of December 31, 2021.
Past and Expected Financial Performance
CARR’s total assets and revenue have increased at CAGRs of 6.4% and 2.9%, respectively, over the past three years.
CARR’s EPS is expected to grow 0.9% year-over-year in fiscal 2022, ending December 31, 2022, and 14.5% in fiscal 2023. Its revenue is expected to decline 3.2% year-over-year in fiscal 2022 and rise 5.5% in fiscal 2023. Analysts expect the company’s EPS to grow at a 12% rate per annum over the next five years.
In comparison, LII’s total assets and revenue have increased at a CAGR of 6.1% and 2.6%, respectively, over the past three years.
Analysts expect LII’s EPS to rise 11.7% year-over-year in fiscal 2022, ending December 31, 2022, and 9.3% in fiscal 2023. Its revenue is expected to increase 7.1% year-over-year in fiscal 2022 and 3.4% in fiscal 2023. The company’s EPS is expected to grow at a rate of 15.3% per annum over the next five years.
Valuation
In terms of non-GAAP forward PEG, LII is currently trading at 1.58x, 1.9% higher than CARR’s 1.55x. In terms of forward EV/Sales, CARR’s 2.25x compares with LII’s 2.49x.
Profitability
CARR’s trailing-12-month revenue is almost 4.9 times LII’s. However, LII is more profitable, with a 15.7% EBITDA margin versus CARR’s 14.1%.
Furthermore, LII’s ROA and ROTC of 17.5% and 31.5% compare with CARR’s 6.3% and 9.2%, respectively.
POWR Ratings
While CARR has an overall B grade, which translates to Buy in our proprietary POWR Ratings system, LII has an overall C grade, equating to a Neutral. The POWR Ratings are calculated by considering 118 distinct factors, each weighted to an optimal degree.
Both CARR and LII have a C grade for Value, reflecting their slightly higher-than-industry valuations. CARR has a 15.59x forward EV/EBIT, 1.8% higher than the 15.31x industry average. LII’s 16.75x forward EV/EBIT is 9.4% higher than the 15.31x industry average.
CARR has a C grade for Growth. CARR’s operating cash flow has grown 32.2% over the past year. LII’s D grade for Growth is in sync with its negative operating cash flow growth.
Of the 54 stocks in the B-rated Industrial - Building Materials industry, CARR is ranked #22.
LII is ranked #55 of 78 stocks in the B-rated Industrial - Machinery industry.
Beyond what we have stated above, our POWR Ratings system has also rated CARR and LII for Stability, Sentiment, Quality, and Momentum. Get all CARR ratings here. Also, click here to see the additional POWR Ratings for LII.
The Winner
Growing demand for HVAC products and solutions should allow both CARR and LII to grow substantially. However, relatively lower valuations make CARR a better buy here.
Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Rating of Buy or Strong Buy. Click here to access the top-rated stocks in the Industrial - Building Materials industry, and here for those in the Industrial - Machinery industry.
CARR shares were trading at $45.62 per share on Thursday afternoon, up $0.71 (+1.58%). Year-to-date, CARR has declined -15.89%, versus a -8.36% rise in the benchmark S&P 500 index during the same period.
About the Author: Sweta Vijayan
Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market.
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