Company Reports

Trane Technologies reported very strong first-quarter financial results, featuring 14% organic revenue growth, 230 basis points of adjusted operating margin expansion to 15.2%, and 38% adjusted earnings per share growth to $1.94. Bookings grew 17% organically in the quarter, resulting in a healthy 1.20 book/bill ratio. Trane’s backlog stands at $7.7 billion, 10% above its 2023 year-end backlog value.

In early 2020, Ingersoll Rand spun off its industrial segment, which immediately merged with Gardner Denver. This new entity assumed the Ingersoll Rand name and stock ticker. Legacy Ingersoll Rand's climate segment was renamed Trane Technologies. We had long viewed legacy Ingersoll Rand's climate business as more attractive than its industrial segment because the former was consistently more profitable and less cyclical.

New single-family home sales increased 4% in 2023 to 666,000 units, as homebuilders capitalized on a dearth of existing for-sale inventory while also offering more sales incentives, cutting base home prices, and building smaller homes to improve affordability. By the fourth quarter of 2023, homebuilders began to pull back on sales incentives as the average 30-year fixed mortgage rate retreated from 7.62% in October 2023 to 6.64% in January 2024. However, mortgage rates have trended higher recently, and we now forecast the average 30-year fixed rate will be 6.50% in 2024, up from our previous forecast of 6.10%. Even so, that’s lower than the 2023 average of 6.81%, and we think homebuilders won’t hesitate to increase sales incentives if needed; they still enjoyed above-average gross profit margins last year with elevated incentives. As such, in 2024, we think new-home sales will increase 9% to 730,000 units and single-family housing starts will increase 4% to 985,000 units. However, we expect total housing starts will decline roughly 5% to 1,345,000 units due to a 23% decline in multifamily starts to 360,000 units, as there’s currently approximately 1,000,000 multifamily units under construction—the largest backlog in at least 50 years.

Trane Technologies’ stock surged over 7% on Feb. 1 as the market digested the narrow-moat firm’s strong fourth-quarter performance and 2024 guidance. Fourth-quarter organic sales increased 6% year over year to $4.4 billion, adjusted operating margin expanded 190 basis points to 15.6%, and adjusted earnings per share grew a robust 19% to $2.17. The excellent fourth-quarter results came despite normalizing demand for Trane's residential HVAC systems and transportation refrigeration products in the Americas. That’s because global commercial HVAC demand (approximately 65% of sales) remains very robust. Indeed, commercial HVAC revenue in the Americas was up at least 25% and grew by a high-single-digit percentage in the Europe, Middle East, and Africa region. Asia-Pacific commercial HVAC sales were flat year on year, but that was a good showing considering the slowing Chinese economy.

In early 2020, Ingersoll Rand spun off its industrial segment, which immediately merged with Gardner Denver. This new entity assumed the Ingersoll Rand name and stock ticker. Legacy Ingersoll Rand's climate segment was renamed Trane Technologies. We had long viewed legacy Ingersoll Rand's climate business as more attractive than its industrial segment because the former has generally been more profitable and less cyclical.

New-home sales have rebounded since the spring of this year as sales incentives and price reductions have attracted buyers who have fewer options in the supply-constrained existing-home market. That said, homebuilder sentiment data tells us that smaller builders remain cautious. Even so, we forecast single-family starts to increase by 3% in 2024, to 0.92 million units. However, we project this increase in single-family starts will be more than offset by a 24% decline in multifamily starts, to 0.36 million units. Multifamily construction has been robust for the past three years, but a record construction backlog and higher construction and financing costs have tamed developers' appetite for new multifamily projects.

Shares of Trane Technologies 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.

In early 2020, Ingersoll Rand spun off its industrial segment, which immediately merged with Gardner Denver. This new entity assumed the Ingersoll Rand name and stock ticker. Legacy Ingersoll Rand's climate segment was renamed Trane Technologies. We had long viewed legacy Ingersoll Rand's climate business as more attractive than its industrial segment because the former has generally been more profitable and less cyclical.

New-home sales have remained resilient despite worsening housing affordability in recent months amid rising mortgage rates, with little relief in home prices in most markets. Year-to-date new-home sales through July were about even with the year-ago period, compared with a 22% decline in existing-home sales. The key to homebuilders’ relative success this year has been their ability to improve affordability by offering sales incentives, lowering base prices, and building smaller homes. According to the National Association of Home Builders, the share of builders offering incentives was 55% in August, up from 52% in July but down from 62% last year. One fourth of homebuilders reported lowering base prices by 6% on average. Homebuilders have also boosted production of speculative homes to capitalize on the tight supply of existing for-sale homes. Spec building also helps builders better manage construction cycle times and costs.

Trane Technologies turned in another strong quarterly financial performance, with second-quarter revenue growing 11% on an organic basis, adjusted operating margin expanding 110 basis points to 18%, and adjusted EPS 24% higher than the year-ago quarter. As we expected, the United States residential heating, ventilation, and air conditioning market is normalized after two years of above-average demand. Trane’s management expects unit volumes to decline by a high-single-digit percentage, in line with our forecast (we see industry shipments falling about 8% this year). We estimate residential HVAC accounts for roughly 20% of consolidated revenue, but robust global commercial HVAC demand (commercial HVAC is about 60% of revenue) has more than offset the residential market headwinds. Indeed, commercial HVAC revenue was up by a low-teens percentage year over year in both the Americas and Europe, Middle East, and Africa regions, and the Asia-Pacific region saw a 45% increase in commercial HVAC revenue against an easy prior-year comparison, largely due to lockdowns in China last year. Finally, Trane’s transportation refrigeration business (roughly 20% of sales) remains on track to outperform its end markets this year.

In early 2020, Ingersoll Rand spun off its industrial segment, which immediately merged with Gardner Denver. This new entity assumed the Ingersoll Rand name and stock ticker. Legacy Ingersoll Rand's climate segment was renamed Trane Technologies. We had long viewed legacy Ingersoll Rand's climate business as more attractive than its industrial segment because the former has generally been more profitable and less cyclical.

Through the first four months of 2023 (typically viewed as the “spring selling season” for homebuilders) new home sales significantly outperformed existing home sales. Indeed, April year-to-date new home sales declined roughly 10% year over year compared to over a 26% decline for existing home sales. New home sales improved sequentially during the first four months of the year, and April sales increased 11% year over year, albeit on an easy prior-year comparison (April 2022 new sales were down 24% year over year).

We’ve raised our fair value estimate for Trane Technologies approximately 1.5% to $142 per share following the narrow-moat-rated firm’s first-quarter results. We made minor tweaks to our five-year forecast, but our fair value increase was primarily due to the time value of money. Trane reported strong results driven by continued robust demand for its commercial heating, ventilation, and air-conditioning products and solutions. First-quarter revenue increased 9% year over year to $3.7 billion, adjusted operating margin expanded 140 basis points to 12.9%, and adjusted EPS rose 26% to $1.41.

In early 2020, Ingersoll Rand spun off its industrial segment, which immediately merged with Gardner Denver. This new entity assumed the Ingersoll Rand name and stock ticker. Legacy Ingersoll Rand's climate segment was renamed Trane Technologies. We had long viewed legacy Ingersoll Rand's climate business as more attractive than its industrial segment because the former has generally been more profitable and less cyclical.

U.S. home sales slowed significantly in 2022 as rising mortgage rates and elevated home prices made homeownership less affordable for more Americans. By mid-2022, the average 30-year fixed mortgage rate had increased roughly 300 basis points year over year to over 6%. According to estimates from the National Association of Home Builders, this rate increase priced out more than 16 million households. We also think higher rates and general economic uncertainty caused some qualified prospective buyers to move to the sidelines. All told, 2022 new- and existing-home sales declined 17% and 18% year over year, respectively.

Shares of Trane Technologies traded higher on Feb. 2 after the narrow-moat-rated manufacturer of HVAC and refrigeration products reported above-FactSet consensus fourth-quarter results and issued bullish guidance for 2023. After reviewing the firm’s outlook and rolling our valuation model forward, we’ve raised our fair value estimate to $140 per share from $129. Still, we see the stock as overvalued at current prices.

In early 2020, Ingersoll Rand spun off its industrial segment, which immediately merged with Gardner Denver. This new entity assumed the Ingersoll Rand name and stock ticker. Legacy Ingersoll Rand's climate segment was renamed Trane Technologies. We had long viewed legacy Ingersoll Rand's climate business as more attractive than its industrial segment because the former has generally been more profitable and less cyclical.

After analyzing recent United States housing market data and industry commentary, we've made downward revisions to our near-term outlook for new residential construction, home prices, and repair and remodel spending.

Trane Technologies reported strong third-quarter results that featured 17.5% year-over-year revenue growth (19% organic), 60 basis points of adjusted operating margin expansion (to 16.7%), and a 26% increase in adjusted EPS from continuing operations (to $2.27).

In early 2020, Ingersoll Rand spun off its industrial segment, which immediately merged with Gardner Denver. This new entity assumed the Ingersoll Rand name and stock ticker. Legacy Ingersoll Rand's climate segment was renamed Trane Technologies. We had long viewed legacy Ingersoll Rand's climate business as more attractive than its industrial segment because the former has generally been more profitable and less cyclical.