Urbanization And Decarbonization Will Fuel Efficient HVAC Solutions

Key Takeaways

• Deep vertical integration and rapid backlog conversion position AAON for strong, sustained revenue and margin growth, outperforming competitors amid shifting market conditions.
  
• Expansion in data center cooling and high-efficiency HVAC, underpinned by automation and innovation, enables above-average long-term earnings and market share gains.
  
• Heavy reliance on vulnerable non-residential markets, slow innovation, margin pressure, and supply chain challenges threaten AAON's long-term competitiveness and profitability.

Catalysts

Engages in engineering, manufacturing, marketing, and selling air conditioning and heating equipment in the United States and Canada.

• Analysts broadly agree that abatement of supply chain constraints for new R454B refrigerant equipment will drive higher production rates, but this is likely understated as AAON's deep vertical integration and U.S.-centric supply chain may actually allow it to outpace competitors in recovering production, leading to outsized revenue growth and a faster rebound in gross and net margins.
  
• Analyst consensus highlights AAON's record $1 billion backlog fueling sustained revenue growth, but this likely understates how rapid backlog conversion, combined with market share gains from a shrinking price premium and robust competitiveness, could support a multi-year period of double-digit revenue and margin expansion as operating leverage kicks in.
  
• Building on surging demand for high-efficiency, customizable HVAC solutions, AAON is uniquely positioned to benefit from accelerating regulatory requirements for decarbonization and energy efficiency, enabling premium pricing power and long-term earnings growth well ahead of industry averages.
  
• AAON's deepening foothold in the data center cooling market, particularly with proprietary liquid and airside solutions, opens a multi-year, high-margin growth opportunity tied to the global AI and cloud infrastructure buildout, which could drive sustained above-consensus revenue and margin expansion.
  
• The company's aggressive and sustained investments in manufacturing automation, capacity expansion, and next-generation innovation-including smart, IoT-enabled systems-set the stage for scalable long-term net margin improvement, enhanced operating leverage, and continued robust free cash flow growth.

AAON Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on AAON compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming AAON's revenue will grow by 15.4% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 12.6% today to 15.1% in 3 years time.
• The bullish analysts expect earnings to reach $291.4 million (and earnings per share of $3.49) by about August 2028, up from $158.8 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 44.4x on those 2028 earnings, up from 42.4x today. This future PE is greater than the current PE for the US Building industry at 22.3x.
• Analysts expect the number of shares outstanding to grow by 0.44% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.12%, as per the Simply Wall St company report.

AAON Future Earnings Per Share Growth

Risks

• AAON's overreliance on non-residential markets, such as offices and schools, means it is highly exposed to secular shifts like remote work and changing commercial real estate patterns, which could lead to stagnating or declining long-term revenue.
  
• The company experienced significant gross margin compression in its core AAON Oklahoma segment, with gross margin down 1,380 basis points year-over-year, and struggled to pass input cost increases onto customers, suggesting ongoing margin pressure and risk to net earnings as input and production costs rise.
  
• The HVAC industry is undergoing rapid technological shifts toward electrification, alternative refrigerants, and smart controls, and AAON has shown a slower pace of digital innovation and product transformation compared to competitors, threatening future revenue growth, market share, and pricing power.
  
• Escalating global supply chain disruptions and resource constraints, as evidenced by recent refrigerant and component shortages impacting AAON's production and backlog conversion, pose a risk to timely product delivery, cost stability, and ultimately, predictable earnings.
  
• Intensifying competition from domestic and foreign manufacturers-accelerated by onshoring, automation, and lower-cost technological entrants-could commoditize AAON's offerings, compress premium pricing, and threaten long-term revenue and margin sustainability.

Valuation

• The assumed bullish price target for AAON is $125.0, which is the highest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of AAON's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $125.0, and the most bearish reporting a price target of just $90.0.
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be $1.9 billion, earnings will come to $291.4 million, and it would be trading on a PE ratio of 44.4x, assuming you use a discount rate of 8.1%.
• Given the current share price of $82.73, the bullish analyst price target of $125.0 is 33.8% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.