Trane Technologies Earnings: 2023 Guidance Raised After Another Strong Quarter

Shares of Trane Technologies TT rallied over 10% during intraday trading Nov. 1 after the narrow-moat-rated HVAC and refrigeration products manufacturer reported another strong quarterly performance. Reported revenue increased nearly 12% year over year (9% organic) to $4.9 billion, and adjusted operating margin expanded 130 basis points to 18% in the third quarter. Adjusted operating margin met our expectations, but reported revenue growth outpaced our forecast by 200 basis points. Strong demand for commercial HVAC products continues to be the primary driver behind Trane’s robust sales growth this year, more than offsetting normalizing North American residential HVAC and transportation refrigeration demand. Commercial HVAC sales remain particularly robust across the education, healthcare, and data center verticals.

Management now expects 10%-11% reported revenue growth in fiscal 2023 (up from around 10% previously) and adjusted EPS of approximately $9.00 (up from $8.80-$8.90). We now model full-year revenue modestly above management’s guidance. Trane’s profit margins have exceeded our expectations this year, and we believe the firm will deliver over a 16% adjusted operating margin in 2023, up from 14.9% last year. Considering our outlook for strong global commercial HVAC demand and recovering North American residential HVAC demand in 2024-25, we think Trane is well positioned to maintain 16% operating margins, on average, over the next five years. We’ve raised our fair value estimate approximately 7% to $163 per share due primarily to our stronger profit margin outlook and the time value of money since our last update.

Trane completed two acquisitions during the second quarter (MTA and Helmer Scientific) and expects to complete its acquisition of Nuvolo during the fourth quarter. In our view, Nuvolo’s cloud-based connected workplace solutions will bolster Trane’s digitalization ambitions across its commercial HVAC footprint.