Rising Rates Will Challenge EMEA As Refrigeration Recovers By 2025

Key Takeaways

• Rising interest rates and economic uncertainty may slow revenue growth in EMEA and Asia Pacific.
  
• Continuous reinvestment in innovation pressures near-term margins despite its positive impact on long-term growth.
  
• Trane Technologies' focus on innovation, green solutions, and a strong sales force positions them for sustained revenue growth and market resilience despite market volatility.

Catalysts

Designs, manufactures, sells, and services of solutions for heating, ventilation, air conditioning, and custom and transport refrigeration.

• Rising interest rates and economic uncertainty might negatively impact the company's financial performance, leading to slower revenue growth in regions like EMEA and Asia Pacific.
  
• Potential overcapacity in the transport refrigeration markets could suppress pricing power and impact revenue growth, given forecasts of flat to slightly growing markets in 2025.
  
• Changes in credit policies in China could lead to stricter terms and reduced order volumes, negatively impacting revenue and potentially increasing days sales outstanding.
  
• The emphasis on continuous reinvestment in innovation, while positive for long-term growth, might pressure near-term net margins due to elevated spending levels.
  
• Forex impacts remain a concern, with negative currency effects projected to reduce earnings and revenue growth in 2025, highlighting potential vulnerability to global economic factors.

Trane Technologies Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Trane Technologies compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Trane Technologies's revenue will grow by 6.0% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 13.1% today to 14.2% in 3 years time.
• The bearish analysts expect earnings to reach $3.4 billion (and earnings per share of $15.14) by about April 2028, up from $2.6 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 26.9x on those 2028 earnings, down from 29.3x today. This future PE is greater than the current PE for the US Building industry at 19.2x.
• Analysts expect the number of shares outstanding to decline by 0.91% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.38%, as per the Simply Wall St company report.

Trane Technologies Future Earnings Per Share Growth

Risks

• Trane Technologies' relentless investment in innovation and its green solutions are driving significant customer demand. This could lead to improved revenue and free cash flow, helping the company maintain or grow its market share.
  
• The company achieved a 12% compound annual growth rate in revenue since 2020 and aims to continue with top quartile organic revenue growth and adjusted EPS growth. This track record suggests that both revenues and net margins may be strong.
  
• The high level of investment in their sales force and solutions has resulted in substantial growth in their applied systems, which offer a service tail that could improve earnings over time.
  
• Despite transport refrigeration markets being volatile, Trane expects a recovery in the second half of 2025 and strong growth in subsequent years, potentially boosting revenues and earnings in those periods.
  
• The company's backlog and pipeline activities remain robust, providing visibility into 2025, and its ability to maintain pricing despite inflation suggests potential resilience in net margins.

Valuation

• The assumed bearish price target for Trane Technologies is $326.77, which represents one standard deviation below the consensus price target of $389.58. This valuation is based on what can be assumed as the expectations of Trane Technologies's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $476.0, and the most bearish reporting a price target of just $237.34.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $23.6 billion, earnings will come to $3.4 billion, and it would be trading on a PE ratio of 26.9x, assuming you use a discount rate of 8.4%.
  
• Given the current share price of $338.33, the bearish analyst price target of $326.77 is 3.5% lower. The relatively low difference between the current share price and the analyst bearish price target indicates that they believe on average, the company is fairly priced.
  
• 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.