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Joint Venture With Samsung And Critical Growth Initiatives Set To Bolster HVAC Market Leadership

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WarrenAINot Invested
Based on Analyst Price Targets

Published

August 08 2024

Updated

August 08 2024

Narratives are currently in beta

Key Takeaways

  • Joint venture with Samsung is set to boost Lennox International's market share and technological leadership in the heat pump sector.
  • Continuous EPS growth and strategic investments in facilities, distribution, and marketing underline a positive future outlook for earnings and revenue expansion.
  • Lennox International faces multiple financial risks, including increased operational costs, partnership execution risks, regulatory compliance challenges, and wage inflation pressures.

Catalysts

About Lennox International
    Designs, manufactures, and markets a range of products for the heating, ventilation, air conditioning, and refrigeration markets in the United States, Canada, and internationally.
What are the underlying business or industry changes driving this perspective?
  • The establishment of a joint venture with Samsung is expected to significantly enhance heat pump market share and technology offerings, impacting future revenue growth and technology leadership in the HVAC industry.
  • Continuous double-digit EPS growth over six consecutive quarters highlights consistent execution of growth acceleration initiatives, likely contributing positively to future earnings and investor confidence.
  • Expansion of the new commercial factory in Saltillo, Mexico, despite initial second half inefficiencies, adds growth capacity to meet customer demand, expected to positively impact revenue and margins in the near future.
  • Increase in full year EPS guidance based on strong first half results and strategic initiatives provides a positive outlook on net income and EPS growth.
  • Investments in distribution growth initiatives and sales and marketing to support long-term growth targets aim at improving customer experience and operational efficiencies, likely to contribute to higher future earnings and revenue growth.

Assumptions

How have these above catalysts been quantified?
  • Analysts are assuming Lennox International's revenue will grow by 7.1% annually over the next 3 years.
  • Analysts assume that profit margins will increase from 12.9% today to 15.2% in 3 years time.
  • Analysts expect earnings to reach $936.4 million (and earnings per share of $27.08) by about August 2027, up from $645.1 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $818 million.
  • In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 25.3x on those 2027 earnings, down from 30.8x today. This future PE is greater than the current PE for the US Building industry at 19.8x.
  • Analysts expect the number of shares outstanding to grow by 0.34% per year for the next 3 years.
  • To value all of this in today's dollars, we will use a discount rate of 7.14%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?
  • Ramp-up costs and inefficiencies associated with the new commercial factory in Saltillo, Mexico, could negatively affect net margins in the short term.
  • The joint venture with Samsung introduces execution risk and reliance on partnership success for growth in the heat pump market, impacting revenue and earnings growth if not successful.
  • Increased investments in sales and marketing to support long-term growth targets might pressure earnings if these investments do not yield expected sales growth.
  • Dependency on the smooth regulatory transition to the new low GWP refrigerant products could pose risks to revenue and net margins if there are any unforeseen compliance challenges or market acceptance issues.
  • Ongoing wage inflation and investments in SG&A and distribution could constrain net margins if cost increases cannot be fully offset by pricing actions and productivity improvements.

Valuation

How have all the factors above been brought together to estimate a fair value?
  • The analysts have a consensus price target of $551.31 for Lennox International based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $675.0, and the most bearish reporting a price target of just $380.0.
  • In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $6.2 billion, earnings will come to $936.4 million, and it would be trading on a PE ratio of 25.3x, assuming you use a discount rate of 7.1%.
  • Given the current share price of $557.44, the analyst's price target of $551.31 is 1.1% lower. The relatively low difference between the current share price and the analyst consensus 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.

How well do narratives help inform your perspective?

Disclaimer

Warren A.I. is a tool utilizing a Large Language Model (LLM) that ingests data on consensus price targets, forecasted revenue and earnings figures, as well as the transcripts of earnings calls to produce qualitative analysis. The narratives produced by Warren A.I. are general in nature and are based solely on analyst data and publicly-available material published by the respective companies. These scenarios are not indicative of the company's future performance and are exploratory in nature. Simply Wall St has no position in the company(s) mentioned. The price targets and estimates used are consensus data, and do not constitute a recommendation to buy or sell any stock, and they do not take account of your objectives, or your financial situation. Note that Warren A.I.'s analysis may not factor in the latest price-sensitive company announcements or qualitative material.
Fair Value
US$551.3
2.1% overvalued intrinsic discount
WarrenAI's Fair Value
Future estimation in
PastFuture01b2b3b4b5b6b20142016201820202022202420262027Revenue US$6.2bEarnings US$936.4m
% p.a.
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Current revenue growth rate
6.66%
Building revenue growth rate
0.17%
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