INVESTMENT THESIS
Our rating on Trane Technologies plc (NYSE: TT) is now BUY, up from HOLD. Trane Technologies provides climate control solutions for buildings, homes, and transportation. These are good long-term businesses. The pandemic has posed a range of near-term problems, which management has been able to navigate as it returns toward growth. Visibility is improving. Even with the aggressive investment, the company’s free cash flow is greater than its net income. We expect the momentum to continue and are establishing a 12-month target price of $160.
RECENT DEVELOPMENTS
Trane Technologies plc, formerly known as Ingersoll-Rand plc, successfully completed its Reverse Morris Trust transaction with Gardner Denver Holdings, Inc.
On October 28, the company reported 3Q adjusted continuing EPS of $1.72. Organic bookings increased 7%. For the nine months ended in September, the company has earned $3.43.
The company is ‘playing aggressive offense’ though the downturn in order to ’emerge even stronger post-pandemic.’ Management is also accelerating fixed-cost take-out programs; total fixed-cost take-out is now $100 million, up from $90 million for 2020, and run rate savings for 2021 are now $140 million, up from $110 million.
The company has suspended 2020 guidance given market uncertainty related to COVID-19. Management noted somewhat improved visibility for 4Q20 revenue, and now anticipates revenue to decline 6% for the year, compared to previous expectations for a 10%-15% decline. Management also anticipates that the free cash flow conversion ratio will be at least 125%.
EARNINGS & GROWTH ANALYSIS
Trane Technologies has three primary business segments that provide commercial heating and cooling systems, building controls, energy services and solutions, and transport refrigeration systems and solutions: Americas (79% of sales), EMEA (11%) and Asia Pacific (9%).
In the Americas segment, reported and organic bookings were both up by 8%. Reported and organic revenues were both up by 2%. The strong operating performance was primarily driven by Residential and Commercial HVAC. Transport revenues were down 20%. Looking ahead, we expect continued strength in Commercial HVAC as buildings prepare for the return of office workers.
In the EMEA segment, organic revenue was down 6% and organic bookings were up 6%. Commercial HVAC organic revenues were down high-single digits and Transport revenues were down more than 20%.
In the Asia Pacific segment, organic revenue was down 2% and organic bookings were down 5%. The adjusted operating margin widened 410 basis points to 17.9%. The China market continues to expand driven by strength in end markets such as data centers, pharma and health care.
FINANCIAL STRENGTH & DIVIDEND
The company has generated free cash flow of $1.1 billion thus far in 2020.
The company has a share repurchase plan, but has suspended buybacks until visibility improves.
ybacks until visibility improves. Trane Technologies pays a dividend. The current rate is $0.53 per quarter, or $2.12 annually.
MANAGEMENT & RISKS
Mike Lamach is the Chairman, CEO and President of Trane Technologies. Chris Kuehn, a five-year veteran at the old Ingersoll-Rand, has become the new CFO of Trane Technologies as Susan Carter, CFO since 2013, has retired.
The company has been active modifying its portfolio of businesses. During 2Q19, IR announced that it would spin off its Industrial Segment to shareholders and combine it with Gardner Denver. This company, now called Ingersoll Rand, is focused on flow creation and industrial technologies.
Investors in TT shares face risks.
COMPANY DESCRIPTION
The company provides climate control solutions for buildings, homes, and transportation. Trane has 50,000 employees.
VALUATION
We think the shares deserve premium valuations, given the company’s cash generation capabilities and the improving visibility of earnings.
On November 12, BUY-rated TT closed at $153.00, down $3.80.
Source: Argus
