Air conditioners from Lennox International (NYSE: LII) to Carrier Global (NYSE: CARR) are heating up

Some of the biggest manufacturers of air conditioning systems are preparing for what could be a major boost, and it’s not just the hot temperatures that continue to surpass records in many parts of the world. New AC units sold in the US will be subject to stricter regulations starting next year, and the shift will help bump up revenues with prices set to rise as much as 20%. 

“Opportunities will result from successfully executing the upcoming refrigerant transition,” Alok Maskara, the CEO of Lennox International (NYSE: LII), said in a recent earnings call, referring to the mandate from the Environmental Protection Agency that will require the use of a new class of cooling fluids that emit fewer greenhouse gases beginning on Jan. 1. 

While owners of older units won’t have to immediately replace them, anyone buying an AC system after the deadline will have to comply with the measure. The new refrigerants are more flammable, and the extra safety features they’ll require are expected to drive up costs that will translate into immediate sales growth for many manufacturers.

The changes come as air conditioning is already a booming industry, with the biggest companies in the sector outperforming the S&P 500 index over the past six months amid solid growth. In that period, Lennox International saw its shares increase 23%, while Carrier Global (NYSE: CARR) gained 27%. Johnson Controls International (NYSE: JCI) and Trane Technologies (NYSE: TT) rose 21% and 26%, respectively. 

The updated units have only accounted for about 5% of systems sold this year and are concentrated in projects that will be completed after the deadline, but Carrier Global CEO David Gitlin said the transition will be felt swiftly once the year rolls over. “We have our initial units out there,” he said in an earnings call. “We’re starting with the residential new construction piece because they’re not going to want mixed developments.”

It’s likely that air conditioning will remain a growth industry for years to come amid widespread demographic changes that are seeing continued population growth in warmer parts of the US, but the timing of the changing regulations is especially noteworthy because it’s all happening just as inflationary pressures are starting to subside across other parts of the economy. With AC prices on track to jump in a single, giant step, manufacturers on a constant quest to improve margins will get some cover as other industries struggle with pressure from the opposite direction. That means the new cooling regime could help ignite not just the top line, but the bottom one as well.