3 Ways To Invest In The Future Of Air Conditioning

Hand of a man opening air intake to remove soiled HVAC filter during replacement of a domestic air … [+] conditioner and heating system filter, used to capture smoke and allergens, in a domestic home, San Ramon, California, September 12, 2020. (Photo by Smith Collection/Gado/Getty Images)

Gado via Getty Images

There could be investment gold in a surprising place — air conditioning.

This roughly $48 billion industry is expected to grow at a 1% annual rate in the next five years propelled by powerful trends — most notably climate change.

Carrier CARR , Trane Technologies, and Johnson Controls are likely beneficiaries of the future of air conditioning.

HVACR Industry

Heating, Ventilation, Air Conditioning and Refrigeration (HVACR) is a large industry that has been hurt by the pandemic but is likely to enjoy modest future growth. According to IBISWorld, in the five years to 2020, residential construction activity has expanded due to rising per capita disposable income and relatively low interest rates.

While office construction has taken a beating as more people work from home, demand for home improvements — including HVACR upgrades — has soared due to the pandemic. IBISWorld expects 1% average growth in this $47.6 billion (estimated 2020 revenue industry) through 2025.


Carrier — a leader in this industry — suffered a decline in revenue in the June-ending quarter. As I wrote last month, Carrier’s second quarter revenue fell 20% to almost $4 billion while adjusted operating profit declined 42% to $442 million from the year before.

Since going public in March, its stock is up 167% to about $32 a share. Evidently investors liked the good news it shared with investors in July: CEO David Gitlin raised guidance for the just ended quarter due to “continued cost reduction actions, progress on our top line initiatives and improvement in the U.S. in June.”

Carrier says it’s positioning itself to capture future growth opportunities — with a specific focus on satisfying demand for indoor air quality (IAQ).

As Chris Nelson, President, HVAC, Carrier said in an October 5 interview, “This global pandemic has shined a spotlight on the importance of [IAQ]. In response to this ever-present – but more center-stage than ever before – need, Carrier launched the Healthy Buildings Program, an expanded suite of solutions to help deliver healthy, safe and efficient indoor environments.”

Carrier offers IAQ assessments — dubbed the Safe Start Service — “to ensure that buildings are ready for occupancy,” Nelson noted. Carrier has recently launched a product in response to the pandemic — the “OptiClean negative air machine which helps clean contaminated air and prevent it from spreading to different sections of a building.”

Expected regulatory changes require HVACR manufacturers to respond now. Nelson pointed out that Carrier is planning now to develop products that comply with “a minimum efficiency change in 2023 for both residential and light commercial products across the U.S.”

Carrier is also working now to comply with “hydrofluorocarbon (HFC) reductions as outlined in the Kigali Amendment to the Montreal Protocol. The first step down in the U.S. is expected [despite uncertainty about its ratification] in 2024 for residential and commercial cooling equipment.”

Carrier’s Healthy Buildings Program provides technologies to boost IAQ. These include MERV, HEPA, and electrostatic filters; an always on “command center” that monitors air quality and equipment health, and the MyWay app that enables building occupants to “personalize their occupant experience,” explained Nelson.

Carrier is also adopting new refrigerants with lower Global Warming Potential (GWP). Nelson warns that “some of these refrigerants are classified as mildly flammable and require additional safety sensors and system design modification.”

Carrier is developing more efficient compressors and partnering with refrigerant makers — most notably The Chemours Company CC — which will replace Carrier’s R-410A with “R-454B as [the company’s] primary lower GWP [refrigerant] in all its ducted residential and light commercial packaged solutions sold in North America,” he said.

Carrier is limiting its business focus to its areas of strength and partnering with companies to close the capability gap and get new products to market more rapidly. To satisfy Carrier’s requirements, potential partners must share its philosophy that “effective partnerships succeed when the parties understand and appreciate one another’s unique strengths and advantages,” Nelson argued.

To adapt to changing customer needs and Carrier’s evolving priorities, Nelson has advice for potential partners. As he said, they “should perform strong self-assessments to understand what they offer, and what they need. When looking to a global HVAC leader like Carrier, they need to be sure that goals align and that they possess strong technology to adapt to emerging trends. Ultimately, it’s about knowing themselves, knowing Carrier, and working together constructively in building the relationship.”


Investors have not been quite as enthusiastic about Trane. Trane’s revenues and profits fell in the quarter ending June 2020 and its stock is up 22.3% so far in 2020. As I wrote last month, its revenues fell 13% to $3.1 billion while operating income dropped 25% to $424 million in the second quarter.

Trane did not offer guidance for the third quarter. According to its earnings announcement, “Given the current uncertainty created by the Covid-19 pandemic and its impact on the Company’s end markets, the Company has not reinstated financial guidance for 2020. The Company intends to reevaluate guidance on its third quarter earnings call.”

Trane is certainly investing in the future of air conditioning and it sees similar opportunities as Carrier does in improving IAQ and reducing greenhouse gases.

As Trane’s chief technology and strategy officer Paul Camuti explained in an October 1 interview, “As a leader in HVAC and climate innovation, increasing global population, economic growth in developing countries, and a warming climate…pose [Trane with] major opportunities [and] responsibilities for [heating and cooling in buildings and homes].”

Trane has set very specific goals for how it will reduce greenhouse gases in its own operations and in its HVAC products. As Dave Regnery, Trane Technologies President and COO, said on October 1, “Heating and cooling buildings today contributes to about 15% of global carbon emissions, and could contribute up to 25% by 2030. [We’ve] set bold sustainability commitments, including reducing our own carbon footprint, and reducing customers’ greenhouse gas emissions by a gigaton (1 billion metric tons) by 2030.”

Trane also sees increased customer interest in IAQ due to the pandemic. In response, Trane is “delivering solutions that help buildings achieve both efficiency and healthier indoor spaces – we believe that you can achieve both,” Regnery said.

Trane has made fast progress in cutting HFCs. As Camuti pointed out, “we were the first to introduce low-global-warming potential refrigerants in our EcoWise portfolio for chillers and refrigerated truck and trailers. We also work closely with organizations like ASHRAE and UL to help shape codes and standards that will accelerate the pace that lower carbon technologies and can meet the sustainability needs of our customers.”

Trane has also introduced technologies for reducing energy consumption and carbon emissions. “Intelligent energy services coupled with solutions such as thermal energy storage can work to reduce peak demand and [ease investment in] renewable electricity generation. Technologies like high-SEER-rated units and heat pump technologies connected to intelligent controls [can] further reduce the environmental footprint of home heating and cooling,” Regnery argued.

Trane is placing a greater emphasis on partnering to meet its climate goals. Camuti explained that the company has created a Sustainability Council of experts in “sustainability, infrastructure development, energy policy, and technology and has created an external advisory council for its Center for Healthy and Efficient Spaces.”

Trane is pursuing new partnerships. As Regnery said, “We are always interested in having conversations about collaborating to achieve a sustainable future for our industry, our customers, and the planet.”

Johnson Controls

Johnson Controls — whose stock is roughly unchanged in 2020 — suffered a less severe revenue decline than Carrier and Trane in the quarter ending June 2020. Its revenue was down 16% and adjusted earnings before interest and taxes fell 11% to $707 million.

Its outlook for the second half of 2020 is less pessimistic. As I wrote in September, CEO George Oliver said in the company’s July 31 earnings call, “Given the trends in Q3, we expect to see a nice sequential improvement in revenue, which is expected to result in a year-over-year organic revenue decline in the high-single to low double-digit range” compared to an earlier forecast of 15% to 20% revenue decline.

Johnson Controls is investing in research to capture the opportunities created by regulations that require new refrigerants.

As David Budzinski, Vice President, Commercial Excellence, Global Products, Johnson Controls, explained in a September 29 interview, “When you think of refrigerant leak-detection systems, a lot is being driven by HVAC companies using more flammable refrigerants. Refrigerant leak-detection systems are critical for people in the building space. And that ties into a Johnson Controls core principle — to keep people safe and healthy.”

Johnson Controls is working on such systems now. “We’re doing different iterations and innovations of our product lines to lead the market in these areas. Our next-generation leak-detection systems are cost effective, connected, intelligent and flexible for people to use on any type of HVAC system or refrigerant-based system,” Budzinski explained.

Johnson Controls redesigned its rooftop unit platform to make it more efficient while complying with new regulatory standards. As he said, the new platform “is 30% more efficient in light commercial space, meets the January 2023 lower emissions refrigerant standards, is energy efficient, and due to its variable-speed compressors reduces overall operating costs while complying with low-HFC refrigerant requirements.”

The company is also using new technology to improve refrigerant leak detection. By incorporating artificial intelligence and predictive diagnostics, Johnson Controls provides “connected systems that allow [customers] to detect building leaks in real-time [so they can] react before it turns into a catastrophic issue,” according to Budzinski.

Johnson Controls partners with customers — end users, channel partners, distributors and system integrators — to keep up with their changing needs. The company also works with technology suppliers — such as Microsoft MSFT , Intel, and Foxconn — to tap expertise that complements its own.

As Budzinski concluded, “Our HVAC and digital intelligence, coupled with market information and direct customer feedback, help us create road maps with our partners. Our goal is to help them advance their businesses with us.”

Investors have concluded so far that Carrier is the best bet on these future opportunities and Trane’s stock has performed admirably. However, if Johnson Controls delivers unexpectedly good growth in future quarters, now would be a good time to invest.

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