In 2020, Ingersoll-Rand (IR) spun off its industrial segment; this left behind the company’s climate segment, which was subsequently renamed Trane Technologies (TT), recalls Doug Gerlach, editor of Investor Advisory Service.

The company is now a pure-play climate control business boasting leading brands and market positions. It sells heating, ventilating, and air conditioning (HVAC) systems under its Trane and American Standard brands, as well as transportation refrigeration under its Thermo King brand.

The company is benefiting from megatrends around sustainability and decarbonization that are providing secular tailwinds. Trane is seeing strong demand across data center, education, healthcare, and high tech industrial.

Trane highlights that 15% of global emissions come from the heating and cooling of buildings, and its market-leading sustainable solutions position it well for continued growth. More energy-efficient heating and cooling systems help companies save money and achieve environmental goals that have become a greater focus.

The company is also benefiting from policy and regulatory changes such as the Inflation Reduction Act and the CHIPS and Science Act, helping drive incremental demand.

A combination of secular trends and policy changes has led to a meaningful $7.3 billion backlog, more than 2.5x what the company considers normal and an increase of 20% versus the prior year. Expectations are for the backlog to moderate through the year but remain strong with a floor of $6 billion going into 2024.

Trane boasts a strong balance sheet and investment grade credit ratings, offering flexibility in capital deployment. Strong free cash flow also allows for continued investment in new technology and innovation.

With acquisitions, the company looks for technologies it can scale quickly given the strong positioning it has across its channels. Historically this has shown to be a fruitful strategy. Regarding repurchases, over the past year Trane has spent over $1 billion buying back stock, reducing its share count by more than 2%.

We anticipate Trane’s strong market position and secular tailwinds will result in revenue growth of 7% a year over the next several years. A combination of margin expansion and share repurchases is expected to lead to average EPS growth of 10%.

Projecting 10% EPS growth over the next five years and applying a high P/E of 26.8, we get a potential high price of $337. Multiplying trailing 12-month EPS by a low P/E of 16.0 results in a low price of $125 and an upside/downside ratio of 3.3 to 1. The potential high total return with dividends is over 15% annually.

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