On Monday, Morgan Stanley (NYSE:MS) initiated coverage on Lennox International (NYSE:NYSE:LII), assigning the stock an Underweight rating and setting a price target of $595.00. The research firm’s stance stems from a cautious outlook on the markets Lennox serves, specifically the residential and light commercial sectors, which are showing signs of a potential downturn. The company, currently valued at $21.8 billion, has demonstrated strong financial health with an overall "GOOD" rating according to InvestingPro metrics.
According to the firm’s analysis, while Lennox has performed well and the HVAC sector presents appealing long-term opportunities, current market indicators suggest a possible organic decline that is not yet factored into the company’s stock valuation.
Lennox shares are currently trading at a premium, with a P/E ratio of 28.9x and high EBITDA valuation multiples. InvestingPro’s Fair Value analysis suggests the stock is currently overvalued, aligning with Morgan Stanley analysts’ concerns about valuation.
Morgan Stanley projects that by 2025, Lennox’s organic growth could lag consensus estimates by approximately 200 basis points due to a combination of challenging comparisons and cyclical headwinds.
Although the upcoming 2025 refrigerant changeover is expected to provide a temporary boost to organic growth, the firm emphasizes that Lennox will need to demonstrate sustained volume growth compared to the market to justify its high valuation.
Despite these concerns, InvestingPro data shows the company has maintained dividend payments for 26 consecutive years and achieved a 4.7% revenue growth in the last twelve months. For deeper insights into Lennox’s financial health and growth prospects, investors can access the comprehensive Pro Research Report, available exclusively to InvestingPro subscribers.
The firm acknowledges that Lennox’s self-help initiatives have potential to improve market share trends compared to historical underperformance. However, the analysts note that the anticipated benefits of these initiatives appear to be already priced into the current stock valuation and estimates.
This leads Morgan Stanley to conclude that the risk-reward balance for Lennox International is skewed negatively, prompting the initiation of coverage with an Underweight rating. The company maintains strong fundamentals with a return on assets of 24.3% and operates with a moderate level of debt, according to InvestingPro analysis.
In other recent news, Lennox International Inc. reported a significant increase in earnings and revenue for the third quarter of 2024, with core revenue up by 15% to approximately $1.5 billion and adjusted earnings per share rising by 24% to $6.68. Following these strong results, the company revised its full-year guidance upwards.
Analyst firms Mizuho (NYSE:MFG) Securities and RBC Capital have maintained their Outperform and Sector Perform ratings respectively on Lennox, while also raising their stock price targets.
In terms of board changes, Janet K. Cooper, a board member since 1999, will not stand for re-election at the 2025 Annual Meeting, and Gregory T. Swienton, a board member since 2010, tendered his resignation in compliance with the company’s retirement age policy. Both departures are scheduled to coincide with the 2025 Annual Meeting and are not due to disagreements regarding operations, policies, or practices.
Lennox has also declared a quarterly cash dividend of $1.15 per share, continuing a trend of 26 consecutive years of dividend payments. The company’s commitment to shareholder returns is further emphasized by 14 years of consecutive dividend increases. These are among the recent developments for Lennox International Inc.
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