HVAC Stocks Have Surged on the Data Center Boom. Are Any Cheap Ones Left?

Key Takeaways

• The intense cooling needs of data centers present a compelling new structural growth opportunity for HVAC companies.
• That said, few HVAC stocks are undervalued, in our view.
• The constant need for energy efficiency sustains demand, as companies have experienced consistent high-single-digit/low-double-digit growth rates.

The global heating, ventilation, and air conditioning business (in which all US-listed companies reported this week) has compelling fundamentals, thanks to several factors. However, these industry and business model characteristics mean their shares are quite richly valued.

The companies with commercial exposure (Carrier Global CARR, Johnson Controls JCI, and Trane Technologies TT) all posted high-single-digit/low-double-digit sales growth and boosted their guidance for the fiscal year. Order books and backlogs saw even more eye-popping growth, ranging from 20% to more than 100%.

The key driver of this performance is these stocks’ exposure to data centers, but all the companies also cited broad-based strength across other verticals, including advanced manufacturing, pharma, medical, and even K-12. Despite this stellar performance, reactions were muted, implying the market is already pricing in most of this upside.

What was more interesting this season was the performance of companies with greater exposure to residential HVAC, where we saw significant bifurcation. For context, residential HVAC has been weak in recent quarters, thanks to anemic housing starts and general consumer malaise. But Carrier and Trane each pointed to an inflection and guided for normalizing conditions and modest growth in the second half.

The surprises came from Lennox International LII and HVAC distributor Watsco WSO. Lennox modestly reduced guidance but has traded down almost 25% since reporting. Watsco, which doesn’t give guidance but also printed weak results, is down nearly 15%. Both companies cited weak volumes (especially for new construction) and consumer preference to repair rather than replace systems amid heightened anxiety over pricing, interest rates, and general macro.

The contrast with peers is particularly noteworthy in an industry notorious for stable market share, so this dynamic will be interesting to monitor in the coming quarters. Lennox and Watsco are both very high-quality companies in a good industry, so while neither resides in 4- or 5-star territory, we would highlight that these recent price movements might create a unique entry point for investors who want exposure to this category.

Carrier Global

Carrier reported 3.0% organic growth to $6.4 billion, but operating margins contracted 190 basis points to 17.2%, and adjusted EPS fell 7.0% to $0.86 on weaker product mix and additional investments in the business. Carrier posted quite impressive backlog and order growth and increased 2026 revenue guidance to $23 billion (up 4.5%) and EPS to $2.90 (up 3.5%). However, the impact of adverse mix on margins likely caused shares to trade off nearly 5% intraday July 28.

The core Americas business saw tremendous commercial order growth, though sales declined on customer delivery timing. The company also saw encouraging double-digit growth in residential and light commercial, though higher new build business weighed on margins.

Europe experienced similar dynamics to the Americas, but on a more muted basis (residential improved, but was outweighed by commercial weakness and mix). APAC Middle East saw tremendous growth ex-China, but China residential was a significant margin drag and an increasing area of management concern.

Trane Technologies

Trane released very strong second-quarter results, with revenue increasing 9% organically to $6.4 billion and adjusted EPS increasing 11% to $4.31. The company saw broad-based strength across its portfolio, including commercial and residential HVAC. The solid print prompted management to increase its 2026 guidance again. Organic growth has increased to 9% from 7%, and adjusted EPS increased 3% at the midpoint to $15.20-$15.30.

While commercial HVAC is delivering tremendous growth rates, Trane also boosted its residential HVAC guidance to mid-single-digit growth, which was a stark contrast with results from peers Lennox and Watsco. Market share in HVAC tends to be quite stable, so we will monitor this carefully.

Johnson Controls

Johnson reported 9% sales growth to $6.6 billion and EPS growth of 15% to $1.23 per share. More impressively, orders grew 27%, and the backlog grew 32% to $21 billion, which bodes well for future growth. The company is experiencing broad-based growth across most of its portfolio, led primarily by its HVAC solutions. More specifically, the company indicated that data centers will likely account for a high-teens percentage of sales in fiscal 2026.

The core Americas region is driving the bulk of the growth, with 37.0% order growth and 260 basis points of margin expansion to 21.1%. The company is experiencing above-average operating leverage (nearly 50%). APAC delivered 12% order growth and EMEA 6% as the Middle East conflict weighs on demand. The company boosted its 2026 sales growth guidance to 8% from 6% and EPS to $5.05 from $4.85 (up 4%).

Lennox International

Lennox reported a 3% increase in revenue to $1.5 billion, 2% growth in operating profit to $355 million (30 basis points of margin compression to 23%), and flat earnings per share of $7.72 in its second quarter.

There was significant bifurcation in performance at Lennox’s two segments. Quite weak performance in residential was mostly offset by very strong performance in the light commercial-exposed business climate solutions segment. The company held its top-line guidance but reduced its EPS outlook by 3% at the midpoint. Revenue shrank 7.0% in home comfort solutions, and margin compressed 130 basis points to 23.7%.

Management cited ongoing weak consumer demand and particularly weak exposure to residential new construction versus replacement. The second half should see volume growth on easier comparisons. The bright spot in the results was business climate solutions, which grew revenue 24.0% (12% organic) and realized 100 basis points of margin expansion to 25.5%. The company did particularly well with large national accounts and emergency replacements. Acquisitions also contributed.

We admit some surprise at management’s grim commentary about the consumer and demand not improving much until 2027. Competitor Carrier sounded a much more optimistic tone about an inflection point in residential HVAC demand.

Watsco

Watsco released disappointing results compared with last year. Revenue increased only 2.0% to $2.1 billion, operating income decreased to 12.0% (11.3% margin), and EPS fell 12.0% to $4.00. Like Lennox, it disappointed investors with anemic performance, sending shares down as much as 15% intraday. Management conceded that its core residential HVAC activities have seen significant volatility in recent years, owing to covid and supply chain disruptions causing significant demand pull-forward, along with regulatory changes to refrigerants. However, Watsco doesn’t give forward guidance, leaving investors confused about how to benchmark where we might be in the cycle. Management acknowledged weakness in new construction but offered that it saw 4%-5% organic growth in units in July. Recall that 70%-80% of HVAC demand is replacement.

Perhaps most concerning to us was management arguing that Watsco’s 2025 gross margin may have been unusually high based on OEM pricing actions, and that the current 27.5% is more reflective of current market conditions. The company is targeting 30% gross margins, and there is elevated uncertainty. Despite July 29’s share price correction, Watsco shares aren’t particularly cheap at 25 times our 2026 EPS.