Trane Technologies Earnings: Full-Year 2023 Guidance Raised After Strong Performance

We’ve raised our fair value estimate for Trane Technologies TT 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.

Management increased its full-year sales growth outlook to 9% to 10% due to a mix of stronger organic growth expectations and greater revenue contribution from acquisitions. The firm has committed $500 million to acquisitions so far, and we expect some other small tuck-in deals could be announced. Management also tightened it’s 2023 adjusted EPS range to $8.30 to $8.50 (from $8.20 to $8.50). We model Trane achieving the high-end of its 2023 EPS guidance.

Trane’s backlog stands at $7.3 billion, up 18% year over year and 2.5 times historical norms, according to management. The firm’s book-to-bill ratio was 117% even with fewer residential HVAC and transportation refrigeration bookings compared with last year. After a period of booming demand during the pandemic, United States residential HVAC shipments are normalizing as we expected. Nevertheless, global commercial HVAC demand (we estimate this business is 60% of total sales) remains robust, with notable strength across data center, education, healthcare, and high-tech industrial verticals.

We continue to believe Trane’s stock is overvalued, and we don’t think its substantial premium over competitors Carrier, Johnson Controls, and Lennox is warranted. Based on FactSet data, Trane Technologies trades at about 22 times 2023 consensus EPS compared with a roughly 17.5 times average multiple for Carrier, Johnson Controls, and Lennox.