Lennox International Rebounds In The 3rd Quarter
Lennox International (NYSE:LII) was not immune to the pandemic. The company saw a 14% decline in YOY revenue last quarter but the bad times are already over. Like so many others, Lennox has proven capable of weathering the storm, and that is well-positioned for the recovery. Not only is the company benefiting from home-improvement trends but it is also supported by a rapidly improving outlook for home building.
Lennox International Beats, Raises, Poised For Growth
Lennox International reported 3rd quarter earnings on Monday and beat top and bottom estimates. The $1.06 billion in top-line revenue is 690 basis points above the consensus and 2.9% above last year’s 3rd quarter. The company says the impact of FX was neutral to revenue while the volume, pricing, and mix were all favorable.
On a segment basis, the Residential business was the strongest (and is the largest in terms of revenue). Residential grew 13% YOY to $722 million while Commercial and Refrigeration fell -18% and -12% respectively. Commercial and Refrigeration are worth about 30% of revenue together and expected to recover over the next two to four quarters.
"Lennox International posted record third-quarter revenue and profit, driven by the performance of our Residential business in the quarter," said Chairman and CEO Todd Bluedorn. "Residential revenue rose 13% and set a new record for any quarter at $722 million. Revenue from replacement business was up low-double digits, and revenue from new construction was up mid-teens. Residential segment profit grew 21% to a third-quarter record $153 million, and segment margin expanded 140 basis points to a third-quarter record 21.2%
Moving down to the bottom line, GAAP and Adj EPS were both well ahead of the consensus due to the above-mentioned factors as well as lower costs and improved productivity. At the GAAP level, EPS of $3.42 beat by $0.29 while Adj EPS of $3.53 beat by $0.38. Comparatively speaking, GAAP EPS is up 16% from last year and a new all-time record.
Looking forward, the company is expecting the 3rd quarter strength to continue into the 4th quarter. While revenue declines are still expected for the year, the guidance is closer to -5% versus the near -10% previously forecast. Because of this, the earnings guidance has been raised from its previous range of $9.05 to $9.65 versus the consensus of $8.83.
Lennox Isn’t Cheap But It’s Growing, And So Is The Dividend
Shares of Lennox International aren’t cheap trading at 32X this year’s earnings and 28X next years. The caveat is that this company is rebounding strongly and expected to grow earnings by over 7% next year. And that does not include what I suspect will be a robust round of analysts upgrades. The analyst community is neutral on this stock but I think that will be changing soon. The 3rd quarter results and guidance are well above the current consensus which means at least a round of updated targets.
The dividend isn’t anything to boast about in terms of the yield, only 1.1%, but it is a safe payment and one that should grow in the coming years. The company had been increasing annually for 11 years but suspended increases in the wake of the pandemic. Even so, the balance sheet is in good shape and earnings are strong so I see no reason why distribution increases won’t be resumed in F2021 if not in F2020.
The Technical Outlook: Lennox International May Be Topping Out
The 3rd quarter earnings are good and the guidance is good but the market does not look good. The stock opened with a gain and set a new all-time high but profit-takers were quick to step in and drive prices lower. The early indications are a top at the previous all-time high and that is confirmed by a Dark Cloud Cover and bearish crossovers in the indicators. The caveat is that today’s candle has only just begun, it’s foolish to make a decision before the session closes. Support may be present at the short-term moving average, a bounce from here would be bullish. If price action falls below the short-term EMA it could fall to $260 or lower.
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