Story Stocks^®

Lennox Intl (LII -4%) is trading lower today despite the HVAC equipment giant reporting a large Q1 earnings beat this morning. Lennox has now reported back-to-back large upside quarters after a miss in Q3. And results likely would have been even better if not for supply chain issues, labor shortages and rising input costs, especially steel.

Adjusted EPS rose 4% yr/yr to a Q1 record of $2.36, which was much better than expected. The revenue upside was more modest. LII also reaffirmed FY22 EPS guidance but increased revenue guidance.

• LII's Residential segment is by far the company's largest segment. Sales rose a very respectable 13% yr/yr to $682.2 mln and that is despite lapping a robust year ago result when sales surged 37%. People were spending a lot on their homes last year, so it was good to see double-digit growth on top of that in 1Q22.
• The biggest challenge in its residential segment has been meeting end market demand. The pandemic has caused supply chain issues and component shortages, resulting in lean inventory levels. However, LII recently said that it expects the situation to improve later in 2022.
• Its Commercial segment struggled with revenue falling 6% yr/yr to $187.7 mln. The silver lining here is that this segment is much smaller than Residential. Commercial demand remained strong; however, this segment remains the hardest hit on the production front. LII has taken aggressive actions to resolve tight labor market and supply chain challenges and it is now seeing signs of improvement.
• LII also has a small Refrigeration segment, which grew a robust 15% yr/yr to $143.5 mln due to higher volume and favorable price and tariffs.

So why is the stock lower despite the upside results? We think the main concern was the poor performance from the Commercial segment, both from a sales and margin compression perspective.

We had been expecting Commercial to act as a nice tailwind in 2022. We follow the steel industry closely and all the major producers are saying non-residential construction is booming. So, we were surprised to hear on the call that new construction revenue fell more than 30%. Finally, this stock has been under pressure since the start of 2022. The Residential side looks robust, but we think LII needs to show improvement on the Commercial side before the share price will be able to recover.