The heating, ventilation and air conditioning (HVAC) business is obviously a prosaic one.
But the stock-market performance of HVAC stalwart Trane Technologies (NYSE: TT) is more poetic than prosaic. It has generated an annualized return of 26.2% over the past 10 years, way above the 14.9% return of the S&P 500.
HVAC, including servicing as well as manufacturing, accounts for 85% of the company’s sales, while 15% come from refrigeration transportation. Trane came out of the breakup of Ingersoll Rand in 2020.
In addition to selling HVAC and transportation cooling systems, Trane offers long-term service contracts for its products and subscription-based software for analytics. The latter allows for building performance analysis. HVAC systems have long lifetimes, creating an extended need for maintenance and repair.
Trane is part of an oligopoly for HVAC in the U.S. that also includes Johnson Controls (NYSE: JCI), Carrier Global (NYSE: CARR), and Japan’s Daikin Industries. The lack of widespread competition is a plus for Trane, but there’s enough to curb its pricing power.
Strength in sustainability
Sustainability represents a key element of the company’s strategy. This includes everything from decarbonizing buildings to advancing energy-efficient technologies and reducing global food loss through refrigeration solutions.
That not only keeps the planet healthy, but also preserves money for Trane’s customers. “In an average building, a staggering 30% of energy after the meter is wasted,” Trane CEO Regnery said in the July earnings call. So there is plenty of room for the company to help customers save energy and reduce emissions, earning a profit at the same time, he said.
By all accounts, Trane is succeeding. “Its technological know-how and service capabilities are key differentiators in commercial HVAC, especially for large, complex projects,” wrote Morningstar analyst Brian Bernard.
“Over the years, these differentiators have allowed the firm to build a large installed base, which can have long useful lives (up to 40 years for applied HVAC systems).” And that, of course, means great opportunities for recurring revenue for servicing their systems.
So it’s no wonder that Trane has reported earnings-per-share growth of 20% or more for four straight years. In the second quarter, revenue rose 8% from a year earlier, and operating profit margin climbed to 20.3% from 19.5%
Data center potential
Data centers constitute a powerful area of growth for the company, as they have massive cooling needs. Trane officials said it had a strong second quarter for data centers, though it declined to provide numbers.
Analysts and investors are impressed. “The data center business will be game changer for them. It’s a strong story for the next three to five years,” Michael Landsberg, chief investment officer at Landsberg Bennett Private Wealth Management, told Bloomberg.
To be sure, Trane doesn’t have a free pass to greatness. Bernard doesn’t see substantial quality differences between Trane, Johnson and Carrier. And competition among them is fierce in the U.S. commercial HVAC space.
Still, Trane has an exemplary track record, as shown by its historical stock performance. And its operating strengths may lead to more success. Prose can be just as good as poetry.
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