Trane Technologies: Strong Backlog Supporting Growth For FY24 And FY25

Core Viewpoint - Trane Technologies has demonstrated strong performance with a 14% increase in stock price since March 2024, outperforming the S&P 500, driven by robust commercial HVAC growth and a favorable outlook for the residential business as interest rates are expected to decline in FY25 [1][6]. Backlog and Growth - The company achieved a record backlog of $7.5 billion, reflecting a 19% organic growth during the quarter, which is expected to support growth through FY24 and FY25 [2][13]. - Trane Technologies has invested in high-growth verticals such as data centers and semiconductor fabs, leading to growth across all 14 tracked verticals in the commercial HVAC market [3]. Revenue and Booking Growth - The applied HVAC business has seen a 90% growth over three years, with management estimating it can generate 8-10 times more revenue over its lifetime [3]. - New product launches, including a residential HVAC and heat pump portfolio, are anticipated to drive demand and improve gross margins [3]. Residential Business Performance - Despite challenges in the U.S. residential market due to high interest rates, Trane Technologies expects mid-single-digit revenue growth for the full year, benefiting from moderating channel inventories and a strong start to the cooling season [5][4]. Financial Outlook - The company raised its FY24 revenue and EPS guidance, projecting organic revenue growth of approximately 10% and adjusted EPS of $10.80 to $10.50, reflecting strong first-half performance [7]. - Trane Technologies anticipates a 12% annual revenue growth rate, with a 40 basis points annual margin expansion driven by pricing increases and operational efficiencies [8]. Market Position and Projections - The U.S. HVAC market is projected to grow at a CAGR of 7.4% from 2024 to 2030, with Trane Technologies expected to outpace this growth due to its applied technology and pricing power [7]. - The company plans to allocate 4% of total revenue towards acquisitions, contributing an additional 2% to overall topline growth [8]. Valuation - A DCF model estimates a one-year target price of $380 per share, based on a cost of equity of 12% and projected free cash flow from equity [10].