As the pandemic continues to strike the global market, many companies, even the large ones, still struggle to cope with it. Although Lennox International, Inc. (NYSE: LII) was not spared from the impact which was quite visible during the first half, the operations remained intact and resilient to help it bounce back in the third quarter. Meanwhile, as the dividends keep growing, it seems to create upward pressure on the stock price as it moves in the same trend with several sharp changes.

Analyzing the Intact and Resilient Operations of the Company

Operating Revenue and Operating Costs

As the operations flourished, Lennox International, Inc. saw a continuous and substantial increase in the operating revenue. For the last 10 years, it had an average annual growth of 3% with some noticeable changes like in 2010 and 2013. Although growth has been relatively slower for the rest of the fiscal years, it remained continuous and sustainable. From $2.84 billion in 2009, it already increased by more than $1 billion as it kept increasing and reached $3.88 billion in 2018. Although it declined by $70 million and landed on $3.81 billion in 2019, the revenue remained high.

It was adjusted due to the impact of divestiture in 2018. Otherwise, growth would be uninterrupted. Nevertheless, it was a strategic move to reposition the company’s operations. The sale of assets or units that no longer make a company efficient is a strategy to further stimulate its operations and come up with better long-run results. Hence, one may expect it to accelerate for the next few years.

Meanwhile, as the company completed another divestiture during the quarter, it was complemented by the restrictions of the pandemic which hurt the operations. It was more keenly observed during the first quarter as sales dropped by $150 million from $1.1 billion to $950 million. Nevertheless, the adequate value showed the company’s resilience in uncertain times as the operations did not falter and remained unharmed. As a result, the accumulated value for the two quarters was 12% lower than in 2019.

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During the third quarter, the company proved that “Comeback is real.” It grew from $1.03 billion to $1.06 billion. With this, the decline in the operating revenue was diminished from 12% during the first half to 7% for the three quarters as it amounted to $2.73 billion. Indeed, one can see that the company was able to fully cope with it. In the last quarter, the company is expected to do better although it may not be able to offset the decline during the first half, the value would remain high. The estimation using the Linear Trend Analysis agrees with the supposition. As a result, the operating revenue may decrease but remain adequate at $3.73 billion before going back to $3.81 billion and continuously increase to $4.1 billion in 2024.

The operating costs had an identical movement to the operating revenue. It has also generally increased over the years but was kept manageable and lower than the revenue. From $2.1 in 2009, it continued to climb up and reached its peak at $2.78 in 2018. Like the operating revenue, it fell to $2.73 billion due to the company’s divestiture in 2019. With this, one can see that the increase was slower. As the years passed by, the efficiency of the company improved rapidly. Their margin grew as well from $700 million to $1.1 billion which was shown by the growing gross profit. It will slightly decrease to $1.06 billion as the impact of the pandemic is also accounted for which adheres to the estimation of the Linear Trend Analysis. For the next few years, the operating costs will remain increasing to $2.9 billion but gross profit would quickly go up as well to $1.2 billion.

Taken from MarketWatch: Lennox International, Inc.’s Annual Financials

Taken from MarketWatch: Lennox International, Inc.’s Quarterly Financials

Net Income

Like the core operations, its non-core transactions have been impressive as it continued to generate higher income. Despite the occasional troughs which were often caused by the unusual/exceptional expenses, net income has dramatically increased over the past decade. The years with a drastic change in value sped up its growth and accelerated as time went by. In 2009, it more than doubled from $51 million to $116 million. It happened again in 2012-2013 and 2015-2016 from $90 million to $171 million and $190 million to $280 million, respectively. Since then, growth has been ranging from $30 to $50 million until it reached its peak at $408 million in 2019. With this, one can see that net income already grew by eight times its value a decade before with an average increase of 30% annually.

As 2020 opened, the company saw a drastic decline in net earnings during the first half. It was primarily driven by its divestitures during the first quarter. From $69 million, it went down to $13 million. It moved along with the change in net sales for the same reason. As the second quarter came, the company already recovered from its divestitures but the impact of the pandemic which affected the operations was reflected on net income as it decreased from $111 to $101 million. Nevertheless, the decrease was relatively low which was caused by the revenue it generated from its non-core operations.

Also, the value in the quarter remained above $100 million like the comparative quarter in the previous years. The accumulated value for the two quarters amounted to $114 million which was $66 million lower than the previous half year. On the other hand, 3Q showed the resilience of the company’s operations. With the increase in revenue and stable non-core transactions, net income made a 15% increase from $115 million to $132 million. As a result, the $66 million decrease was lessened to $50 million, given the accumulated value of $245 million versus $295 million in 2019.

Given the impressive growth in 3Q, the remaining quarter is expected to be better for the company as it has fully adapted to the current situation. With this, the value of net income may also increase substantially but not enough to cover the decrease in the first half. Hence, it agrees with the estimation of net income which will decrease at the end of the fiscal year before going up again continuously and surpass $500 million in 2023 and 2024.

Taken from MarketWatch: Lennox International, Inc.

Taken from MarketWatch: Lennox International, Inc.

Return on Asset

The company’s assets have increased substantially over the years. It is composed mostly of fixed assets, intangible assets, receivables, inventory, and cash items. Its increase matched with the increase in sales and operating costs shows that the company’s operations have been increasing over the years. The continuous growth in the margin suggests the company’s increasing efficiency to utilize its resources well. But it’s also important to know two things. First, one has to gauge how profitable the assets have been for the last 10 years. Second, how adequate the earnings have been to help the company sustain the growth in assets and the operations as a whole.

Its Return on Asset (ROA) shows the same trend with net income. Normally, the trend has been less smooth than net income since there were years when net income decreased and grew slower than the assets, and vice versa. Meanwhile, the increasing pattern of ROA suggests the increasing viability of the company’s assets and the improvement in the sustainability of the company’s earnings to sustain the growing operations as shown by the consistency of the assets with sales and operating costs.

With this, one can also prove the increasing capacity of the company to further stimulate its operations and cover its financial obligations. The increasing pattern ROA along with fixed assets from $300 million to $600 million and inventory from $400 million to $500 million which are vital for the operations shows that the company’s earnings can sustain the company even in the long run. Moreover, ROA remained above 10% since 2013. In 2019, it already reached 19% which suggests that the company earned 19% for every purchased asset. For the next five years, ROA will exceed 20%.

Taken from MarketWatch: Lennox International, Inc.

What’s in Store for the Investors?

Dividends Per Share

Lennox International, Inc. has been generously raising its dividend payments for more than 10 years. Over the past decade, the dividends have grown by more than five times with an average annual growth of almost 20%. The dividends per share have increased by $0.04 to $0.16 per year as it moved from $0.56 per share in 2009 to $0.92 per share in 2013. But after exceeding $1.00 per share in 2014, growth has become rapid from $1.14 per share to $1.65 per share in 2016. In 2017, it sped up from $1.96 per share to $2.95 per share in 2019.

As a Dividend Contender, it may still have to go a long way to further prove its consistency. But its commitment for more than a decade and the increasing earnings do not suggest a possibility of a dividend cut. As 2020 came, despite the impact of the pandemic, the company managed to generate adequate earnings to sustain dividend payments. At the end of the fiscal year, it is estimated to increase to $3.08 as proposed. Using the Dividend Growth Model, the value may even go higher for the following years from $3.20 per share to $3.88 per share.

Taken from Nasdaq: Dividend History

Dividends, Net Income, and Free Cash Flow

As the company remained generous with its dividend payments, it ensured its adequacy to sustain and even raise the value. In 2009, the Dividend Payout Ratio was above 90%, but since 2010, the ratio has become more stable. From 2015 to 2015, the ratio played between 50% and 60%. The current percentage is ideal, not too small or large but adequate to sustain the continuous growth both in earnings and dividends in the long-run. As estimated using both the Dividend Growth Model and Linear Trend Analysis, the Dividend Payout Ratio would remain adequate at 60%

Moreover, the direct impact of earnings on the operations can be proven using Free Cash Flow (FCF) since it checks the net cash inflows from operating assets and liabilities. For the last 10 years, Capital Expenditure (CAPEX) has significantly increased from $40 million to $100 million. It proves the increase in fixed assets in the Balance Sheet. With this, the consistency and the continuous enlargement of the operations can be confirmed.

Given the increasing FCF, one can see that after deducting all the expenses from the operations, particularly CapEx, the company still had enough to sustain dividend payments, meet the obligations and further fortify its operations for a long period. Although FCF was lower than dividends in 2011 and 2014, it remained increasing. Since 2015, their gap widened although it narrowed again in 2019 as both the dividends and CapEx grew substantially. For the next few years, it is estimated that both will increase and their gap will become wider at more than $100 million.

Taken from MarketWatch: Lennox International, Inc. and Nasdaq: Dividend History

Stock Price

After reaching its 2020 all-time low at $165.15 last March 23, it suddenly shifted swiftly after a few days. Since then it has continuously increased and surpassed $200. After reaching its peak at $289.41 last October 12, the stock price seemed to start decreasing to $248.45 last October 19. But started increasing again to $288 a few days later. Since then, the price has seemed to start decreasing again. The high volatility is evident here which makes it difficult to predict the trend of the price. The price varied by more than $5 thrice in less than a month.

Last October 16 and October 19, it fell by almost $10 before increasing again by about $6. With a P/E Ratio of 29.42, it agrees with the high risk given the high amount one must risk for every possible gain due to volatile price. Also, the ratio suggests overvaluation which seems to agree with the price trend for the last five trading days. However, the impressive performance of the company in the recent quarter, as well as the consistent dividend growth, seem to suggest a different observation. With this, one may refer to the Dividend Discount Model to either confirm or deny it.

Current Price: $276.57

Average Dividend Growth: 0.1824485843

Estimated Dividends Per Share: $3.08

Cost of Capital Equity: 0.1936254178

Derived Value: $327.029805 or $327.03

Given the derived value, it ignored the possibility of overvaluation and may push the price upward. Nevertheless, the model is limited to dividends and price only and does not consider other factors that may cause price changes. Hence, it is advisable to read more press releases of the company and be updated on the current events that may have an impact on the industry.

Growth Catalysts

Lennox International, Inc. in the Time of Pandemic

As the pandemic struck different industries, almost all of the companies in the US felt its scourge and Lennox was not an exemption. From the decline in sales and earnings in 1Q 2020 due to its divestitures, the pandemic came a few weeks later. The impact was keenly felt during 2Q but the company remained sound, given the potentially drastic decrease in sales and earnings was prevented. Although the values were lower compared to the previous year, both sales and earnings remained within the range and remained adequate to keep its operations intact and firm. In 3Q, the company proved the line “Comeback is real.”

Sales and earnings grew again which gave an offsetting effect to the decrease during the first half although the accumulated amount remained lower. Everything is slowly adapting to the situation; the employment is going up again and the company has coped with it fully. Given this, the company is expected to do better during the fourth quarter. The increasing purchasing power and the current situation where many still work in the comfort of their homes may give upward pressure on the demand for its products. The adaptability of the company and its strategic operations may increase sales and earnings in 4Q. Further growth is expected as everything has fully adapted and gone back to normal.

Feel the Love Program

Through its Feel the Love Program, Lennox International, Inc. honors those who are going through physical, mental, and social disabilities and those who inspire through military and community service. Now, the company honors those who serve in the front line such as the medical workers and the security forces. Since its creation more than a decade ago, the program has become successful and helped a lot of people.

With this, the program may entice benefactors, public and private institutions, and other companies to make partnerships or attract investments for this program. It may stimulate the company’s operations that may also increase the frequency and impact of this initiative. Hence, it may help the company receive more popularity, partnerships, demand, and even investments that may cause further growth in the long run.

Key Takeaways

As the review on the company’s performance concludes, one may still wonder about its future given the uncertainties and challenges brought upon by the pandemic. Some companies remained strong. Some were hurt. Some remained unchanged while the others went out of business. With the current situation, should one take a chance on the company?

Short-term Investors: The trend for almost two weeks shows a decreasing pattern. It seems to adhere to the potential overvaluation as shown by the P/E Ratio. But the sharp changes that still occur seem to neutralize the trend. It seems to go down but will come back after a day or two. Moreover, the Dividend Growth Model disagrees with the P/E Ratio as it shows that the stock price is undervalued by about $50. This may be justifiable, given the impeccable results in 3Q and the situation that gets better as time goes by. The changes in stock price remain appealing to the risk-takers due to the possibility of instant gains. But the still unclear trend of the price must also serve as a warning. Hence, being updated on current events and the company’s press releases is highly recommended. If you’re a risk-taker who wishes to see instant gains, then the stocks may be good for you.

Long-term Investors: The dividends have been increasing over the years. Growth has been evident. Meanwhile, as the company remained generous to the investors, it maintained its high capacity to suffice it. Given the increasing sales and earnings that remain consistent with the changes in the operating assets, particularly fixed assets and inventories, the profitability of the company shows long-term sustainability. It was confirmed with the increasing pattern of CapEx and FCF that showed the company has enough to sustain its operations and continue dividend payments for a long period. With this, the company guarantees long-term growth and stability.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.