Lennox International Shares Cool Off After Tepid Guidance

Lennox Is A Buy At Lower Levels Than These 

The question is not if Lennox NYSE: LII was able to produce growth but how badly was its business impacted by inflation, supply chain issues, and shipping disruptions? The company did not quantify those impacts but we can assume they easily run into the mid to high-single-digits if not more. Demand for products is strong on most levels and hindered only by season weakness in the commercial market that was amplified by the spread of Omicron. The takeaways from the report are that the business is growing, margins shrank less than expected, and growth is in the forecast. The caveat is that these factors may not be enough to keep share prices where they are with the valuation running above the broad market average and the dividend yield far less than what you can find elsewhere in the market. 

"Covid-19 and global supply chain disruptions continued to have a significant impact on operations in the fourth quarter as expected, and reported financial results were also impacted from having 6% fewer days than in the prior-year quarter," said Chairman and CEO Todd Bluedorn. "In the face of these challenges, the team performed extremely well.

Mixed Results Lead Lennox International Lower 

Lennox International had a good quarter if one that was impacted by supply chain hurdles and inflation. The good news is that the company capped off a record-setting year with a record-setting Q4 in which revenue is up 2.3% to 934. 8 million. The bad news is that revenue missed the consensus by 220 basis points but there is one more factor to be aware of. The Q4 period had 6% fewer days than last year (about one week) which also impacted sales. That said, residential sales led with a gain of 12% over last year while refrigeration rose a smaller 6% and the commercial segment declined 11%. 

Moving down the report, the segment margin fell 560 basis points to 10.6% but the decline was less than expected. This led to some strength on the bottom line despite YOY declines in earnings. The company’s adjusted EPS of $2.35 is down from last year’s $2.89 but beat the Marketbeat.com consensus estimate by $0.36. 

Looking forward, the company is guiding for growth but only reiterated its revenue outlook for 5% to 10% expansion while upping the EPS for tax-related gains only. The new target for EPS is a range between $13.50 and $14.50 compared to the analyst's estimate for $14.04. This is far less than the market was expecting and needed to keep prices moving higher and may lead to some additional downside for share prices. 

Lennox Dividend Is Safe, Growth May Slow 

Lennox International’s dividend is safe enough but growth may slow from the 16% pace it has maintained over the past few years. The company is yielding about 1.3% which is better than the broad market average but not that high compared to some other, lower-valued stocks we’ve covered lately. In our view, investors can count on the dividend and even dividend growth but they shouldn’t count on it helping to sustain shares prices at this time. 

The Technical Outlook: Lennox Falls In Wake Of Earnings Report 

Shares of Lennox rose in premarket trading and opened the session following the earnings release with a small gap higher. That gap was met by sellers who then drove share prices down more than 3.25% confirming what looks like a downtrend to us. Price action may find support at the $270 level but we see it being tested vigorously if not broken. A break below this level would be bearish and could take the stock down another $20 to the $250 level.