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Climate control solutions innovator Lennox International (NYSE:LII) missed analysts' expectations in Q2 CY2024, with revenue up 2.8% year on year to $1.45 billion. It made a non-GAAP profit of $6.83 per share, improving from its profit of $6.10 per share in the same quarter last year.
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Lennox (LII) Q2 CY2024 Highlights:
- Revenue: $1.45 billion vs analyst estimates of $1.48 billion (1.9% miss)
- EPS (non-GAAP): $6.83 vs analyst estimates of $6.57 (4% beat)
- Gross Margin (GAAP): 33.6%, up from 32.4% in the same quarter last year
- Free Cash Flow of $151.3 million is up from -$52.3 million in the previous quarter
- Organic Revenue rose 8% year on year (3.4% in the same quarter last year)
- Market Capitalization: $20.28 billion
Based in Texas and founded over a century ago, Lennox (NYSE:LII) is a climate control solutions company offering heating, ventilation, air conditioning, and refrigeration (HVACR) goods.
HVAC and Water SystemsTraditionally, home construction materials companies have built economic moats with expertise in specialized areas, brand recognition, and strong relationships with contractors. More recently, advances to address labor availability and job site productivity have spurred innovation that is driving incremental demand. However, these companies are at the whim of residential construction volumes, which tend to be cyclical and can be impacted heavily by economic factors such as interest rates. Additionally, the costs of raw materials can be driven by a myriad of worldwide factors and greatly influence the profitability of home construction materials companies.
Sales GrowthExamining a company's long-term performance can provide clues about its business quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Unfortunately, Lennox's 6.3% annualized revenue growth over the last five years was mediocre. This shows it couldn't expand in any major way and is a tough starting point for our analysis.
Long-term growth is the most important, but within industrials, a half-decade historical view may miss new industry trends or demand cycles. Lennox's annualized revenue growth of 7.6% over the last two years is above its five-year trend, suggesting some bright spots.
We can dig further into the company's sales dynamics by analyzing its organic revenue, which strips out one-time events like acquisitions and currency fluctuations because they don't accurately reflect its fundamentals. Over the last two years, Lennox's organic revenue averaged 8.2% year-on-year growth. Because this number aligns with its normal revenue growth, we can see the company's core operations (not M&A) drove most of its performance.
This quarter, Lennox's revenue grew 2.8% year on year to $1.45 billion, falling short of Wall Street's estimates. Looking ahead, Wall Street expects sales to grow 8.4% over the next 12 months, an acceleration from this quarter.
Operating Margin Operating margin is a key measure of profitability. Think of it as net income–the bottom line–excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.
Lennox has been an optimally-run company over the last five years. It was one of the more profitable businesses in the industrials sector, boasting an average operating margin of 15.5%. This was particularly impressive because of its low gross margin, which is mostly a factor of what it sells and takes huge shifts to move meaningfully. Companies have more control over their operating margins, and it's a show of strength if they're high when gross margins are low.
Looking at the trend in its profitability, Lennox's annual operating margin rose by 2.8 percentage points over the last five years, showing its efficiency has improved.
In Q2, Lennox generated an operating profit margin of 22.1%, up 2.3 percentage points year on year. This increase was encouraging, and since the company's operating margin rose more than its gross margin, we can infer it was recently more efficient with its general expenses like sales, marketing, and administrative overhead.
EPS We track the long-term growth in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company's growth was profitable.
Lennox's EPS grew at a spectacular 14.7% compounded annual growth rate over the last five years, higher than its 6.3% annualized revenue growth. This tells us the company became more profitable as it expanded.
We can take a deeper look into Lennox's earnings quality to better understand the drivers of its performance. As we mentioned earlier, Lennox's operating margin expanded by 2.8 percentage points over the last five years. On top of that, its share count shrank by 9.4%. These are positive signs for shareholders because improving profitability and share buybacks turbocharge EPS growth relative to revenue growth.
Like with revenue, we also analyze EPS over a shorter period to see if we are missing a change in the business. For Lennox, its two-year annual EPS growth of 17.9% was higher than its five-year trend. We love it when earnings growth accelerates, especially when it accelerates off an already high base.
In Q2, Lennox reported EPS at $6.83, up from $6.10 in the same quarter last year. This print beat analysts' estimates by 4%. Over the next 12 months, Wall Street expects Lennox to grow its earnings. Analysts are projecting its EPS of $17.99 in the last year to climb by 20% to $21.59.
Key Takeaways from Lennox's Q2 Results It was good to see Lennox beat analysts' organic revenue and EPS expectations this quarter. However, its full-year EPS guidance, which is more important, fell short of Wall Street's estimates. Overall, this was a bad quarter for Lennox. The stock traded down 4.9% to $540.52 immediately following the results.
