Lennox Earnings: Guidance Raised Again After Another Strong Quarter; Completes Bolt-On Acquisition

Lennox’s LII third-quarter performance handily exceeded our expectations as both its residential and commercial segments delivered robust revenue growth and profit margin expansion. Core revenue (that is, excluding European operations, which will soon be divested) increased 10% year over year as higher prices and a favorable mix shift to more energy efficient and premium products more than offset lower volumes. And segment-adjusted profit margin expanded 330 basis points year over year to 19.3%, primarily due to favorable price and product mix.

Residential heating, ventilation, and air conditioning shipments have declined in line with our expectations after two years of above-average demand. Nevertheless, Lennox’s residential segment delivered 7% revenue growth and expanded adjusted operating margin 180 basis points to 20.2%. Revised HVAC minimum energy efficiency standards that went into effect in 2023 have spurred sales of more efficient and higher-priced products. For the full year, management expects residential revenue to increase roughly 2% as price and mix more than offset about a 6% volume decline.

Lennox’s commercial business, which had been in turnaround mode, has recovered nicely this year, and third quarter revenue (adjusting for resegmentation) increased 15% year over year, and adjusted segment margin expanded 9.1 percentage points to 24%. Management expects full-year commercial revenue to increase 15% year over year on flat volume.

Management now expects full-year core revenue to grow 5% (2%-4% previously), adjusted EPS of $17.25-$17.75 ($15.50-$16.00 previously), and $350-$400 million of free cash flow (versus prior guidance of $300-$350 million). We’ve boosted our near- to medium-term outlook for both revenue growth and profit margins, and we raised our fair value estimate 8.5% to $298 per share.

In late October, Lennox announced the acquisition of a $100 million HVAC installation and services firm for $90 million.