Supply Issues Give Lennox Investors A Chill

Demand For Lennox Offset By Supply Chain Issues

Lennox International NYSE: LII is evidence the systemic issues plaguing the market are not something to be ignored. While the average S&P 500 company is still beating the consensus figures that is not true across the market. Companies like Lennox are seeing both top and bottom-line effects from supply chain issues that are driving results below consensus. In the case of Lennox, as it is with most businesses, demand remains strong so the outlook is still positive if cloudy. The question investors want to have answered is if things will get worse before they get better and we think they will get worse. Until then, Lennox investors can sit tight knowing the dividend is safe and still growing, we don’t think we’re in for a crash, but there may be a better time to make your next purchase. 

Lennox Might Have Beat The Consensus 

Lennox didn’t have a bad quarter, just one less strong than what it could have been. The point, at least for now, is that revenue might have beat the Marketbeat.com consensus if not for supply chain issues. The company estimates a $0.075 billion impact from the disruption which is more than the $0.070 difference between actual results and consensus but that is not what’s driving price action today. Today, price action is being driven by the $1.06 billion in actual revenue and the 620 basis point shortfall versus the consensus. More importantly, price action is being driven by the 120 basis point contraction in the margin that left earnings well below the consensus. 

"Demand remained strong across all our end markets in the third quarter, but global supply chain and Covid-19 disruptions to production and our labor force materially impacted financial performance," said Chairman and CEO Todd Bluedorn. "The company had negative impact of approximately $75 million to revenue and $25 million to operating profit from these constraints in the third quarter, and we currently expect a similar level in the fourth quarter.

The GAAP earnings of $3.41 are more than enough to sustain the dividend and future growth but fell short of consensus by $0.26. At the adjusted level, earnings are still strong but missed the consensus by $0.18 leaving the guidance in question. The company’s guidance is also a bit weak, with the EPS range narrowed by 320 basis points at the top end. Based on the Q3 results and our assessment of bottlenecks within the system, there is a downside risk in this guidance. Not only is there a chance for sales to be impaired but for costs to rise especially in the area of freight and shipping. 

Lennox Dividend Growth May Slow 

Lennox pays a safe and growing dividend and one with a positive outlook for growth but this quarter raises a red flag. Free cash flow fell to $199 million in the quarter which is not enough to pay the dividend and sustain share buybacks. What this means to us is either a slow-down in repurchase activity or a slow-down in dividend growth or both. The upshot is that YTD cash flow and FCF have allowed the company to pay down debt as well so there is that to consider. Regardless, the next dividend increase is expected in March 2022. 

The Technical Outlook: Lennox Slips, Investors Buy The Dip 

Shares of Lennox fell more than 5.0% in premarket trading to gap lower at the open but investors quickly scooped up the shares. Price action is now rivaling the prior sessions’ close and looks strong from the technical perspective. Buyers are confirming support at the $295 level and indicating a possible reversal in price action. Assuming price action can sustain the upper side of the short-term EMA into the close of trading we would expect to see it trend sideways and begin moving higher. If not then investors should brace for another test of the $295 level and possibly a move lower.