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Lennox (LII) Shares Decline Post 2020 Guidance Announcement

Zacks Equity Research

Lennox International Inc.‘s LII shares fell more than 5% on Dec 18, after the company unveiled its financial guidance for 2020 and reiterated 2019 view. Moreover, it has provided updates to 2019 capital expenditure and effective tax rate guidance.

For 2020, the company expects adjusted revenue growth (excluding divestiture impact) in the range of 4-8%. Adjusted earnings are anticipated within $11.30-$11.90 per share, lower than the Zacks Consensus Estimate of $11.75 (considering the midpoint of the guided range). This lower-than-expected earnings guidance might have hurt investors’ sentiment.

Moreover, the company expects 2020 corporate expenses to be $90 million and capital expenditures of $153 million, including approximately $53 million of insurance proceeds for reconstruction of the Iowa manufacturing facility. Notably, Lennox projects $400 million of share repurchases during the year.

For 2019, the company has reiterated its view for adjusted revenue growth of 2-4%, adjusted earnings within $11.15-$11.45 per share and corporate expenses of approximately $85 million.

Meanwhile, the company now expects an effective tax rate of approximately 21.5%, lower than previously guided range of 22-23%, on an adjusted basis. Also, it projects capital expenditures between $129 million and $155 million (approximately $155 million expected earlier). Meanwhile, the capital expenditure guidance includes approximately $29 million of insurance proceeds.

A Glance at Lennox’s Third-quarter 2019 Performance

During third-quarter 2019, the company’s earnings missed the Zacks Consensus Estimate by 1.5%, while revenues marginally beat the same. Meanwhile, the metrics grew 26% and 0.3%, respectively, on a year-over-year basis. The company’s quarterly performance was adversely impacted by tornado and divestitures.

Despite being hurt by adverse weather conditions in key regions served, the Residential business posted revenue growth of 7% and margin expansion of 80 basis points in the last reported quarter. The upside was attributed to higher volume and pricing, along with lower material costs, favorable warranty, tariff rebates as well as insurance proceeds for lost profits.

In the Commercial business, revenues were up 7% year over year on double-digit growth in the national account equipment business. However, revenues in the Refrigeration business fell 2% year over year due to lower factory efficiency, unfavorable mix, higher commodities and other product costs, tariffs as well as higher SG&A expenses.

Will Investments Strategy and Initiatives Combat Headwinds?

Underlying market conditions in its core residential and commercial HVAC markets and strong pricing power are expected to drive the company’s performance. Again, new investments for the expansion of distribution footprint, research and development projects, as well as recent marketing programs are expected to be conducive to the company’s top line. Historically, it has been generating strong results during the heating season.

Although weather-related woes and divesture of the Kysor Warren and South America businesses are expected to impact its performance to some extent, we believe that improving replacement market, solid residential construction (primarily new constructions) and equipment sales will continue to drive growth.

Lennox has solid prospects, as is evident from the Zacks Consensus Estimate for three-five year earnings growth rate of 20%. Overall, it constitutes a great pick in terms of growth investment, supported by a Growth Score of A.

Courtesy of the above-mentioned tailwinds, shares of Lennox — which shares space with AAON, Inc. AAON, Comfort Systems USA, Inc. FIX and Watsco, Inc. WSO in the Zacks Building Products - Air Conditioner and Heating industry — have outperformed its industry in the past three months.



Zacks Rank

Lennox currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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AAON, Inc. (AAON) : Free Stock Analysis Report
 
Comfort Systems USA, Inc. (FIX) : Free Stock Analysis Report
 
Lennox International, Inc. (LII) : Free Stock Analysis Report
 
Watsco, Inc. (WSO) : Free Stock Analysis Report
 
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