COVID-19 Invest Ideas: Heating, ventilation, and air conditioning companies

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Published on: October 27, 2020
Author: Amy Liu

The global residential HVAC market size is expected to grow by USD 16.97 billion. This marks a significant market slow down compared to the 2019 growth estimates due to the impact of the COVID-19 pandemic in the first half of 2020. However, steady growth is expected to continue throughout the forecast period, and the market is expected to grow at a CAGR of 5%.  The pandemic is also providing major opportunities to companies that can help manage the risks of COVID-19 for indoor ventilation.

This Article will cover the following companies:

– Johnson Controls (NYSE:JCI)Sees Many Reasons For Optimism

– Trane’s (NYSE:TT) Revenues And Operating Income Drop With Outlook Uncertain

– Carrier (NYSE:CARR) Sees June Uptick In Demand Less Pessimistic Outlook

ATI Airtest Technologies Inc (TSXV:AAT) Sees Growing Interest for its CO2 measurement systems to protect indoor spaces from COVID-19

The market is driven by the increasing demand for energy-efficient HVAC systems. In addition, the rising residential construction activity is anticipated to boost the growth of the Residential HVAC Market.

Growing concerns regarding emissions from HVAC systems and the environmental damage caused by them are compelling several regulatory bodies to frame stringent regulations and mandate manufacturers and users to comply with those regulations. Developed countries such as the US, Canada, and various European countries have framed regulations to increase the adoption of environment-friendly refrigerants and the use of energy-efficient equipment. In order to comply with these regulations and ensure the high efficiency of HVAC systems, several vendors are offering energy-efficient HVAC systems for residential buyers. Therefore, residential buyers are persistently opting for energy-efficient HVAC systems. Thus, the increasing demand for energy-efficient HVAC systems is expected to drive the growth of the market.

While Covid-19 is holding back growth in the HVAC market for other reasons. Global lockdowns have halted HVAC equipment manufacturing and supply, bleak economic prospects have caused buyers to refrain from non-essential purchases, and infrastructure projects “have been thrown off schedule, due to reduced funding and laborers heading back home,” according to P&S Intelligence.

Despite these industry challenges, three major HVAC suppliers remain optimistic.

Johnson Controls Sees Many Reasons For Optimism

JCI’s financial report for the quarter ending June 2020 was not great. Its revenue was down 16% and adjusted earnings before interest and taxes fell 11% to $707 million.

JCI’s outlook for the second half of 2020 is less pessimistic. As CEO George Oliver said in the company’s July 31 earnings call, “Given the trends in Q3, we expect to see a nice sequential improvement in revenue, which is expected to result in a year-over-year organic revenue decline in the high-single to low double-digit range” compared to an earlier forecast of 15% to 20% revenue decline.

JCI sees many reasons for optimism among its business customers. As David Budzinski, JCI’s Vice President, Global Products Commercial, told me on September 10, “On the commercial HVAC side, we’re seeing increased demand in retrofits and replacements to combat the pandemic by [retrofitting] their systems and [accommodating] greater outdoor air, UV-C (ultraviolet light) additions, bipolar ionization or filtration.”

JCI is also enjoying “an unprecedented uptick in retail demand” from consumers due to global warming and Covid-19. There’s more heat in the south and southeastern U.S. and there has been “a phenomenal uptick in incoming [Japanese] order volumes in July and August. In addition, as people spend more time in their homes they want to upgrade their systems to get cleaner air,” explained Budzinski.

It’s not all milk and cookies for JCI. As he explained, commercial office vacancies — think restaurants, light-commercial buildings, and even some universities — are still high. While commercial HVAC quotes are up over 30%, “project awards are just not coming through at the rates we traditionally saw them.”

JCI expects the effects of the pandemic — most notably a desire for cleaner indoor air — to linger long into the future. As he said, “Greater than 50% [of residential customers] are looking for a higher Minimum Efficiency Reporting Values (MERV) rating of filtration to filter out micro-organisms, viruses, and dust.” JCI’s new product development group is putting a higher priority on “themes such as healthy buildings, clean air, and touchless or frictionless environments,” Budzinski concluded.

Trane’s Revenues And Operating Income Drop With Outlook Uncertain

Trane’s revenues and profits fell in the quarter ending June 2020. Its revenues were down 13% to $3.1 billion while operating income dropped 25% to $424 million.

Trane did not offer guidance for the third quarter. According to its earnings announcement, “Given the current uncertainty created by the Covid-19 pandemic and its impact on the Company’s end markets, the Company has not reinstated financial guidance for 2020. The Company intends to reevaluate guidance on its third quarter earnings call.”

Trane is investing in innovation seeking to satisfy the growing demand for “safer and more resilient communities.”

A Trane spokesperson told me September 3 that “a global team of experts from the company’s commercial and residential HVAC and transport refrigeration businesses will [work in Trane’s Center for Healthy and Efficient Spaces (CHES) to] evaluate and scale the latest advancements in indoor environments across Trane’s transport, homes, and commercial buildings customer base.”

Carrier Sees June Uptick In Demand Less Pessimistic Outlook

Carrier’s results for the second quarter of 2020 were not as bad as expected. Nevertheless Carrier’s revenue fell 20% to almost $4 billion while adjusted operating profit declined 42% to $442 million from the year before

As David Gitlin, Carrier Global CEO said in a July 31 earnings conference call, “The second quarter was better than we expected, driven by our continued cost reduction actions, progress on our top line initiatives and improvement in the U.S. in June.”

Carrier was also more optimistic about the quarter ending September 30. “We are raising the low end of our prior outlook for sales, adjusted operating profit and cash flow enabling us to add back some targeted growth investments that we had previously scaled back,” according to Gitlin.

Carrier’s HVAC revenue decline was less severe than the fall in its corporate revenue. HVAC sales fell 15% — offset somewhat in the U.S. by “a substantial pickup in June. We exited the quarter with a backlog about twice last year’s level and inventories in the field down about 25%. The commercial HVAC business was down 17% [and light commercial dropped around 20%],” CFO Timothy McLevish said in the earnings conference call.

Like JCI, Carrier is optimistic about the future for its HVAC business. That’s due to a key trend “around healthy, safe and sustainable buildings. We feel confident in our medium-term outlook of mid-single-digit sales growth, high single-digit EPS growth and cash flow equal to net income,” said Gitlin.

Demand for cleaner indoor air has enabled Carrier to win orders for its air scrubber machine, the OptiClean HEPA filter. As Gitlin told investors, “We’ve seen very solid order activity whether it’s a dentist office or K through 12, we’ve seen very strong demand there. We’ve installed chillers and some of the building operators have come back and said, ‘Can I upgrade the filtration system?’”

Carrier says it’s uniquely well-positioned to offer its HVAC, controls, fire and security products in a “One-Stop-Shop.” For example, Carrier can give a restaurant “a red, yellow, green on all aspects of the healthy and safe indoor environment,” said Gitlin.

ATI Airtest Technologies Inc (TSXV:AAT) Sees Growing Interest for its CO2 measurement systems to protect indoor spaces from COVID-19

In June 2020, George Graham, President of AirTest, announced that the company’s TR9277-EO wireless CO2 Temperature and Relative Humidity transmitter is being used as an important part of the COVID-19 Phase 3 initiatives for the re-opening of office spaces for major Silicon Valley tech companies.

Traditionally, measuring CO2 in a building can be used to control the delivery of outside air to ventilate indoor spaces to ensure proper ventilation. This generally results in significant energy savings due to the elimination of overventilation. These sensors can also measure adequate circulation of fresh air in indoor spaces and are commonly required to be installed in conference rooms to measure space conditions. Jon Sargeant of IBS said: “In these times of COVID19 concern, the sensors are used to ensure that spaces are ventilated at the highest possible level without compromising building comfort or air quality”. Sargeant also explained that existing wired CO2 sensors were installed and wired to the BMS system in the building but as they started to recommission the building, they discovered that many were widely out of calibration.

AirTest Technologies is a Green-Tech company specializing in sensors that improve commercial building operating efficiency and at the same time create energy savings. These sensors are all based on technical innovations developed in the last ten years and comprise a growing second wave of energy saving technologies that are positioned to make a significant contribution to the Sustainable Buildings Program. AirTest offers its products to leading-edge building owners, contractors and energy service companies targeting the buildings market. AirTest also provides energy cost reduction solutions to building equipment and controls manufacturers who incorporate AirTest sensor components in their products.

Disclaimer: NAI is being compensated for this content. Materials contained in this content are for information purposes only and is not intended to constitute an offering of securities in any jurisdiction. Nothing on this content should be construed as an offer, solicitation or recommendation to buy or sell products or securities.

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