Lennox International Blows Past Consensus With Hot 28% YOY Revenue Gain

The Analysts Forgot About Lennox 

With the boom in housing over the past year we are not surprised to see Lennox (NYSE: LII) YOY growth in the double-digit range. Seriously, the company makes air conditioners and heat pumps. What we are surprised by is the utter lack of activity in the analyst community. Over the past three months, only 4 of the 13 analysts covering the stock had anything to say and, while bullish, grossly underestimated this company’s performance. More surprising is the fact this company only carries a neutral rating when all signs point to continued outperformance this year and next. The takeaway is that not only are Lennox Q1 results strong and the outlook robust but the analyst’s community is lagging in sentiment. This has the stock set up for a round of analysts upgrades we think could drive it up another $35 by the end of the summer

"Demand remained strong across all our businesses entering the second quarter, and we are capitalizing on market growth and share gain opportunities with strong operational execution. Looking ahead for 2021 overall, we are raising guidance for revenue and earnings, as well as for free cash flow – now approximately $375 million for the full year. We have repurchased $200 million of stock this year and plan to buy $200 million more in 2021,” says CEO Todd Bluedorn. 

Lennox Revenue, Earnings, and Outlook Top Consensus Estimates 

 To say that Lennox’s revenue, margins, and earnings blew past the consensus estimates is a bit of an understatement. The company produced a cool $930.5 million in net consolidated revenue worth 28.6% in YOY growth. This is a company record, aided by a 1% FX tailwind, and beat the consensus by 1700 basis points. The gains were driven by strength in all three segments with notable improvement in the commercial and European markets. The Residential segment grew 37% and Commercial 12% both on strength in new and replacement equipment. The Refrigeration segment grew 21% with double-digit gains in both the U.S. and European markets. 

Moving down, the company was able to leverage the revenue gains to full effect. Total segment margin improved more than 700 basis points to help drive triple-digit gains in earnings. The GAAP $2.20 is up 588% from last year while the adjusted $2.27 is up a smaller 305%. Both beat the consensus by very wide margins, $0.90 and $0.95 respectively, or about 72%. Needless to say, this brings the company’s valuation down to a much more reasonable level and that doesn’t include the guidance. 

The company’s guidance was raised significantly because of the first quarter’s strength and building momentum. The company is now calling for 7% to 11% YOY growth this year versus the 4% to 8% previously guided putting earrings in a range of $11.33 to $11.93. This compares to the $11.19 consensus and we think it is cautious. If momentum continues to build in the economy like we see happening revenue growth could top 15% by the end of the year. 

Lennox Is On Watch For A Dividend Increase 

Lennox hasn’t increased its dividend for about two years but it looks like one could be coming down the pipe. The company hasn’t increased for about two years but it does have a long history of increases and room on the books to do so. At face value, the company is only paying out about 26% of its consensus estimate and we know that estimate is too low. When compared to the high-end of guidance the ratio falls to 25% and we think guidance is low. Looking at the balance sheet, the company has some debt but not a debilitating amount, and leverage is very low. Based on the Q1 report and outlook FCF is on the rise as well and adds some weight to the argument, as does the decision to buy back more stock. 

The Technical Outlook: Lennox Breaks Out To New High 

Shares of Lennox International are up more than 3.5% in early premarket trading and trading at a new all-time high. The move confirms an uptrend that began in March and suggests this stock could add another $35 or more in the near to mid-term. Assuming the March-to-now rally is capped by a bullish flag, today’s break out confirms the flag pattern and its $50 flagpole. Projecting the $50 flagpole upward from the $330 level gives a target of $380 or about 10% upside from this morning's gains. If the stock pulls back to close the gap before moving higher as we think it might, this stock is looking at a 15% to 20% gain in the next couple of months.