Investment Opportunities in Climate Solution Stocks Gained Momentum in 2024. Will Their Uptrend Persist in 2025, or Will They Experience a Downturn?
Investment Opportunities in Climate Solution Stocks Gained Momentum in 2024. Will Their Uptrend Persist in 2025, or Will They Experience a Downturn?
The desire for heating, ventilation, and air conditioning (HVAC) systems radically escalated in 2024, spurring substantial growth for enterprises that offer climate solutions, such as Lennox (LII dropping by 1.53%) and Trane Technologies (TT descending by 1.19%). This surge in demand propelled Lennox's shares to surge beyond 40%, while Trane Technologies' stock soared over 55%, surpassing the more than 25% rise of the **S&P 500****.
Let's delve into the factors propelling their upward trends and speculate if they'll continue their ascent or experience a decrease in 2025.
Gaining Heat in 2024
Lennox is synonymous with energy-efficient climate-control solutions. The demand for its products, including air conditioners, furnaces, heat pumps, and indoor air quality systems, has noticeably increased this year. In the third quarter, its core revenue skyrocketed by 15% to $1.5 billion, encompassing a 2% increase stemming from recent acquisitions (Lennox bought AES to expand its commercial HVAC services towards the end of the previous year).
Simultaneously, its adjusted earnings per share escalated by 24%, while its free cash flow augmented by 50%. Home comfort solutions revenue swelled by 15% to $1 billion, while revenue from its building climate solutions also expanded by 15% to $465 million.
This impressive performance allowed the company to amplify its full-year projection. It anticipates revenue to surge by 10% in 2024 (with the AES deal adding 2% to its revenue). Lennox also widened its earnings per share range and elevated its free-cash-flow outlook.
Trane Technologies also displayed comparable growth. Revenue rose by 11% in the third quarter to $5.4 billion, while adjusted earnings per share soared by 21%. This sustained the company's "history of delivering exceptional revenue and earnings-per-share growth," pointed out CEO Dave Regnery in the third-quarter earnings press release. The company also continued to witness robust bookings, totaling $5.2 billion in the quarter, a 5% increase compared to the same period preceding it.
The climate technology company is experiencing robust demand for its eco-friendly solutions, particularly for commercial HVAC systems. This inspires its belief that it will deliver another robust year of growth, with revenue projected to go up by 11% in 2024.
The Prospect for 2025
Trane Technologies' robust bookings bestow it an outstanding impetus heading into 2025. Its backlog reached $7.2 billion, with a significant surge compared to the $6.9 billion recorded at the end of 2023. Furthermore, it boasts a strong project pipeline, specifically for commercial HVAC solutions. Consequently, the company expects "2025 to be another impressive year," asserted Regnery in the third-quarter earnings release.
Lennox also has considerable momentum heading into 2025. It recently introduced the most energy-efficient air conditioner system on the market, which will aid residential customers in cutting their energy bills. It also forged a joint venture with Samsung to produce heat pumps and other comfort solutions products. The company expects demand for these higher-value products to escalate in 2025. It also expects to gain traction in the commercial market, largely due to the inauguration of its new factory in Mexico.
Will they keep escalating the heat in 2025?
This growth could empower their stocks to continue ascending in 2025. However, if there's one potential drawback, their valuations have become somewhat inflated. Trane Technologies currently trades at a forward price-to-earnings (P/E) ratio of more than 34 times, while Lennox fetches nearly 30 times its forward earnings. This is costly compared to the broader market. The S&P 500 trades at around 22 times forward earnings, while the even more expensively valued **Nasdaq-100**** index fetches approximately 27.5 times its earnings estimate.
In the event that demand for their climate solutions products unexpectedly wanes in 2025, their stocks will likely receive a frosty reception from investors. However, if they persist in delivering substantial growth, their shares could proceed to climb higher.
Investors might consider the inflated valuations of both Lennox and Trane Technologies when deciding whether to invest further in 2025, given that their forward price-to-earnings (P/E) ratios are significantly higher than the broader market.
Diversifying one's investment portfolio by considering other sectors, such as technology or information services, could be a wise move, considering the Nasdaq-100 index trades at a lower forward P/E ratio compared to Lennox and Trane Technologies.