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3 Stocks Poised to Thrive in the Booming Air Conditioner & Heating Industry

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The Air Conditioner & Heating industry is experiencing significant growth opportunities due to the energy transition and the pro-environmental drive. With increasing demand for renewable generation and solutions, companies like Watsco, Inc., The AZEK Company Inc., and AAON, Inc. are well-positioned to capitalize on this trend. Despite supply-chain disruptions and inflationary pressures, these industry players are thriving by providing maintenance, monitoring, and repairing services, along with cost-management practices. Additionally, the replacement of older systems to reduce electricity consumption and carbon footprint, as well as investments in new technologies, act as major tailwinds for the industry.

Industry Overview

The Building Products – Air Conditioner & Heating industry encompasses designers, manufacturers, and marketers of various products for heating, ventilation, air conditioning, and refrigeration markets. This includes rooftop units, chillers, air-handling units, condensing units and coils, as well as thermostats, insulation materials, refrigerants, grills, registers, sheet metal, tools, concrete pads, tape, and adhesives. Products are sold in residential replacement, commercial and industrial HVAC, and residential new construction markets.

Key Trends Shaping the Future

1. U.S. Administration’s Pro-Environmental Moves: The focus on reducing greenhouse gas emissions aligns with the industry’s goal of providing clean and efficient energy systems. Industry participants are also benefiting from the growing controlled-environment agriculture industry. The residential and non-residential markets, along with repair and remodeling activities, are contributing to the companies’ success.

2. Technology Augmentation & Inorganic Moves: Investments in technologies and digital platforms are enhancing the customer experience. Companies are expanding their distribution and investing in research and development to drive top-line growth. Strategic acquisitions are helping them broaden their product portfolios and geographic footprints. Services related to equipment maintenance and repair provide stable revenue sources.

3. Supply-Chain Challenges, Rising Costs, and Regulations: Supply-chain issues and increasing raw material costs are impacting profit margins. Operating expenses have risen due to pandemic-related challenges and logistics costs. Stringent regulations on energy efficiency and gas emissions pose risks. Seasonality and competition also affect industry revenues.

Bright Prospects for the Industry

The Zacks Building Products – Air Conditioner & Heating industry has a strong outlook, with a Zacks Industry Rank #32, placing it in the top 13% of industries. The industry’s earnings estimates for 2023 have seen positive revisions, indicating analysts’ confidence in its growth potential. Over the past year, the industry has outperformed the broader Zacks Construction sector and the Zacks S&P 500 composite, with a gain of 45.7%.

Stocks to Watch

1. Watsco, Inc. (WSO): Based in Miami, FL, Watsco is the largest distributor of HVAC/R equipment in North America. The company’s continuous investment in technologies and customer-centric approach have contributed to its success. With a VGM Score of A, WSO is an intriguing investment option.

2. AAON, Inc. (AAON): Headquartered in Tulsa, OK, AAON manufactures air conditioning and heating equipment. The company benefits from robust replacement demand in the non-residential building market and has consistently outperformed earnings estimates. AAON carries a VGM Score of B.

3. The AZEK Company Inc. (AZEK): Based in Chicago, IL, AZEK manufactures environmentally-sustainable outdoor living products. The company’s strategies for growth and productivity, along with expanding product offerings and customer base, have led to strong operational performance. AZEK has a VGM Score of A.

These stocks offer solid growth potential and are worth considering for investors’ portfolios. While they currently carry a Zacks Rank #3 (Hold), their positive outlook and performance make them compelling options.

Conclusion

The Air Conditioner & Heating industry is thriving due to the energy transition and pro-environmental initiatives. Companies like Watsco, Inc., The AZEK Company Inc., and AAON, Inc. are well-positioned to benefit from these trends. With a positive outlook for the industry and strong growth potential, these stocks are worth watching for investors seeking opportunities in the market.

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