Stocks for a Hot Summer Day
Ryan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
This summer has been a scorcher in the western states. Las Vegas and Salt Lake City have set record temperatures in the past month. Even Death Valley, the site of the hottest temperature ever recorded on Earth, is getting close to its record high of 134 degrees. Rangers at Death Valley have even had to clean large amounts of partially-cooked eggs off of the sidewalk. Apparently, you can't fry an egg on a rock, even if it is 129 degrees.
These record temperatures haven't caused too much trouble for those individuals lucky enough to have access to quality air conditioning systems, however. The following companies make money by keeping you cool.
The biggest of the bunch
With a market cap of $17.7 billion, Ingersoll-Rand (NYSE: IR) is by far the largest of the companies we'll look at today. This Irish company is in the business of creating safe and comfortable environments. Air conditioning systems for residential users are only a small piece of the company's climate control business.
Looking at the company's most recent annual report you will notice that they have $7.3 billion dollars worth of shareholder's equity. That is a decent amount in relation to the company's market cap.
If you look more closely at the company's balance sheet, however, you will see that over $10 billion of the company's assets are not tangible. Not to say this company's intangibles don't have value, but if they were subtracted from the equation then the company's equity would be negative by over $3 billion.
The company generated $665.1 million of net income in 2012, well above its 2010-2012 average of $550 million. It hasn't posted negative earnings since 2008. In that year, net income was negative by approximately $2.6 billion dollars. This was a result of the company taking a write-down on the value of its intangible assets in the amount of $3.275 billion.
The high level on intangibles on this company's balance sheet worries me. Additionally, this company has the lowest returns on equity, both during the trailing twelve months and over a five-year span, of any company I will be discussing.
Another mediocre option
Lennox (NYSE: LII) is another option for investors looking for a piece of the climate control sector. Sales of residential heating and cooling systems make up 46.6% of the company's revenues. The remainder is almost evenly split between commercial heating and cooling, and refrigeration.
The company's average net income for the 2009-2011 period was $85.2 million. That represents a compounded annual growth rate of 4.9% from the three-year period a decade earlier (1999-2001.) The figure would be higher if I had not altered the numbers a bit. I added a $26.8 million restructuring charge back in to 2001 earnings, reducing what would've been a $42.4 million dollar loss. I didn't want a massive loss to distort the growth figures.
Even if this company immediately doubled its net income I still would not want to buy it. Let's say that Lennox started generating $200 million in annual net income, more than double the 2012 figure. Would you pay $3.5 billion dollars for a company that was only generating $200 million a year?
The best investment of the group, and that doesn't say much
With a market cap of $941.9 million, AAON (NASDAQ: AAON) is a small company when compared to Lennox and Ingersoll-Rand. This company's climate control solutions only serve commercial customers. It is possible that this focus was a factor in it having the highest net profit margins of the group.
Net income data on this company extends back to 1991. In those 22 years, the company has never had a net income figure that was negative in full-year results.
The company's net income for 2012 was $27.45 million. The average figure for 2009-2011 was $21.2 million, which represents a 10-year compounded annual growth rate of 5.7%. Those figures are not good enough for me to justify paying $941.9 million.
AAON has the lowest price-to-tangible-book ratio of the featured companies at 6.25. That is still a very high multiplier, however. The only companies that are worth paying 6.25 times tangible book for are either established concerns with serious intrinsic value, or high-growth companies. AAON is neither.
The bottom line
Its been an incredibly hot summer. Many people (but sadly, not me) are fortunately able to beat the heat thanks to a high-quality air conditioning system. Air conditioning is an awesome innovation that society will continue using for many decades to come.
That being said, stocks in the climate control field, or at least the stock of these three companies, don’t look like great investment options right now. Ingersoll-Rand would have negative equity if it weren’t for a bunch of intangible assets on its balance sheet, and Lennox and AAON are expensive relative to their respective net incomes. Unless these companies increase their profits by a massive and practically impossible amount, investing in them is not a good idea at this time.
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Ryan Palmer has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!