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Lennox International Inc.: Initiation of Research Coverage

Tuesday, January 12, 2016

William Blair & Company initiated research coverage of Lennox International Inc. (LII $118.93), a leading manufacturer of residential, commercial and refrigeration products.

Analyst Ryan Merkel estimates the company will generate 15%-20% earnings per share growth from 2015 to 2018, with EPS of $6.55 in 2016 and $7.55 in 2017.

"Lennox is the only pure-play OEM in the HVAC space, and management's execution has been impressive," Merkel said. "The North American HVAC industry is benefiting from multiple tailwinds, including pent-up replacement, improving mix, healthy new construction, and rising adoption of variable refrigerant flow, or VRF, technology. We believe these tailwinds should drive 3%-4% industry growth over the next several years. We estimate that Lennox's share-gain programs will drive growth 3% above the industry during the next few years. The company's main share-gain tactics include expanding market access with more distribution points and new innovative products, attacking the commercial emergency replacement market, and developing a strong VRF product offering."

Merkel continued, "Lennox is the No. 3 provider of HVAC/R—heating, ventilation, air conditioning, and refrigeration—with an estimated 15%-20% share of the $20 billion North American addressable market. Lennox differentiates itself with innovative products, 80% company-owned distribution, and a full range of products for home comfort. Management forecasts a 6% sales compound annual growth rate, to $4.1 billion in 2018, with 30% incremental margins. We expect Lennox to be one of the fastest growers among our industrial coverage list over the next several years."

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