I like to read the Canadian publication Corporate Knights. It provides me with some great ideas for renewable energy stocks to buy. An article from the end of February entitled, “To fight inflation, get a heat pump,” caught my attention for several reasons.
“Canada will have to install hundreds of thousands more heat pumps over the next three years and current sales trends indicate to get on track to decarbonize home heating and cooling by 2050, a webinar audience heard Thursday afternoon,” Corporate Knights contributor Mitchell Beer wrote.
As the article points out, if you live where fossil fuels are an expensive way to heat your home — I live in Nova Scotia, and they are that — it’s a no-brainer to switch from heating oil to electricity.
Funnily enough, before my wife and I moved to Nova Scotia, we had never lived with a heat pump. They have a downside — don’t expect them to like subzero temperatures — but they are much cleaner than oil. And you don’t have to get a delivery every couple of months.
It got me thinking about heat pump manufacturers. Who are the big names, and are any of them publicly traded?
There are several of them. Here are three whose stocks make sense as heat pumps continue to replace heating oil over the next twenty years.
Carrier Global (CARR)
Carrier Global (NYSE:CARR) is the largest of the three stocks, with a market capitalization of $51.3 billion. United Technologies spun it off on April 3, 2020. Its shares are up 238% in the three years since, considerably better than the S&P 500.
Carrier manufactures heating, ventilation, and air conditioning, refrigeration, and fire and security equipment. Its product solutions include heat pumps for commercial and residential use. It sells several cold-climate heat pumps, including its Infinity System, Performance Series, and Comfort Series.
The company’s HVAC segment sells these heat pumps under the Carrier brand. The segment also produces equipment for the HVAC industry under brands such as Toshiba, Automated Logic, Bryant, etc.
In 2024, HVAC accounted for $15.1 billion of its $22.5 billion in revenue. New equipment accounts for 76% of Carrier’s revenue, with the remaining 24% for parts and service. That’s excellent recurring revenue. Approximately 58% of its revenue is from the Americas, with Asia/Pacific accounting for 20% and EMEA (Europe, Middle East, and Africa) accounting for the remaining 22%.
In 2024, it will exit its Fire & Security and Commercial Refrigeration businesses, investing more in its HVAC segment through its Jan. 2 acquisition of Viesmann Group for $14.2 billion. Heat pumps were a big part of this acquisition.
A.O. Smith (AOS)
A.O. Smith (NYSE:AOS) is the second largest of the three stocks, with a market cap of $12.5 billion. Its shares are up 27% over the past year and 67% over the past five. It can do better.
The first time I wrote about A.O. Smith was in July 2019. I liked the company because of its China business. It did globalization correctly, building manufacturing in China for Chinese consumption. And it planned to duplicate its business model in India.
As for heat pumps, it doesn’t make them. Instead, as one of the world’s leading manufacturers of water heaters, it makes hybrid electric heat pump water heaters. These use heat pump technology — generally sucking the air from outside into the hot water tank — that makes them up to 2-3 times more efficient than traditional water heaters.
I first became interested in the company because of its tankless water heaters. They now make electric versions rather than using gas. It’s another nudge in the direction of renewable energy.
How’s their business?
It reported record sales of $3.9 billion in 2023 with record net earnings of $557 million. It trades at 21 times its earnings per share guidance of $4.03 in 2024.
Watts Water Technologies (WTS)
Watts Water Technologies (NYSE:WTS) is the smallest of the three companies, with a market cap of $6.8 billion. Based in Massachusetts, the company estimates that the total market for its products, which includes heat pumps, is $20 billion. It generated about 10% of that in 2023.
As with all its competitors, Watts should continue growing because its products are considered safer, more energy efficient, and conserve water. So, an investment in Watts is likely to be profitable; it’s doing good for the world.
Regarding heat pumps, its Lync by Watts brand delivers commercial and industrial heat pump water heaters. It launched the Aegis product line in 2021. The Aegis A is an air-source heat pump water heater, while the Aegis W is water-sourced.
“Our goal is to provide owners, engineers, and contractors with peace of mind knowing that with a Lync solution in place, they have a complete, integrated system of the highest quality that has been carefully designed and assembled by the heating and hot water experts,” HPAC Magazine reported the comments of Vincent D’Amore, director of product solutions at Watts Water.
At the end of December 2023, the company’s net cash was $52 million, down from $163 million a year earlier, but still providing a fortress-like balance sheet. Its free cash flow in 2023 was $281.10 million, 107% of its net income. Anything over 100% is outstanding.
Its 2023 operating income was $350.9 million from $2.06 billion in revenue. That’s up from $239.6 million in 2021 from $1.81 billion in revenue.
Watts Water is a “controlled company.”
Timothy P. Horne holds 68.3% of the votes. Horne is a former CEO of the company and a descendant of Burchard Everett Horne, who bought Watts Regulator in 1918. Since going public in 1986, its shares are up 3,388%.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
