Summary
- Trane Technologies' total return outperformed the Dow average for my 49-month test period by 124.57%, and the current price is a bit high but has a growing revenue backlog.
- Trane Technologies' three-year forward CAGR of 13% is good and will give you steady growth with the increasing worldwide economy and industrial budgets.
- Trane Technologies' dividend yield is below average at 1.5% and has increased for ten years.
Trane Technologies ( TT ) is one of the largest manufacturers of heating, ventilation, air conditioning, refrigeration systems, and other industrial systems and is a buy for the total return growth investor. Trane Technologies has good cash flow, and the company uses some of the cash to expand its product line. The remainder is used to increase dividends yearly and buy back shares raising the stock price. Trane Technologies is 7.3% of The Good Business Portfolio, my IRA portfolio of good business companies balanced among all investing styles. This full-growing position will be watched and trimmed when it reaches 8% of the portfolio.
As I have said before in previous articles.
I use a set of guidelines I codified over the last few years to review the companies in The Good Business Portfolio (my portfolio) and other companies I am reviewing. For a complete set of guidelines, please see my article " The Good Business Portfolio: Update to Guidelines, March 2020 ". These guidelines provide a balanced portfolio of income, defensive, total return, and growing companies that hopefully keep me ahead of the Dow average.
Trane Technologies is a great investment for the industrial growth investor as the United States economy is growing, and the recent earnings show it is growing well. Still, we have rising interest rates and high inflation as a negative. I will hold my 7.3% position in the portfolio.
Fundamentals
One method I use to compare companies is to look at the total return. If a company cannot beat the market, why do you want to invest in it? The good Trane Technologies' total return of 169.35% compared to the Dow base of 44.78% makes Trane Technologies a good investment for the total return investor. Looking back five years, $10,000 invested five years ago would now be worth over $27,500 today. This gain makes Trane Technologies a good investment for the total return investor looking back, which has future growth as the United States and the worldwide economy continues to grow with the increasing need for more HVAC equipment to fight global warming and COVID.
A quote from the 4th quarter earning call by the CEO David Regnery sums up the recent business productivity as the impact of the COVID pandemic is controlled, helping the company get back to normal.
Our strategy is aligned with powerful megatrends, like climate change which has serious and far-reaching effects on the environment, the economy, and human health. 2022 was again one of the warmest years on record, and we continue to see extreme weather events. Urgent action is needed to accelerate our transition to a low-carbon green economy. That's where Trane Technologies is uniquely positioned to lead. Our innovation is transforming the industry and accelerating the decarbonization of commercial buildings, homes, and transport. Our purpose-driven strategy, relentless innovation, and strong customer focus enable us to deliver a superior growth profile, strong margins, and powerful free cash flow. The end result is strong value creation across the board for our team, our customers, our shareholders, and the planet. We will enter 2024 with a backlog of $6 billion or more. Turning to our guidance for 2023. We expect continued strong revenue growth, EPS growth, and free cash flow. We have a proven strategy to outperform end markets, and our business operating system enables us to deliver consistent strong execution despite challenging macro environments. Net of these two areas, free cash flow would have been 100%. We've deployed more than $13 billion in capital, with an $8.3 billion return to shareholders in the form of dividends and share repurchases. Looking forward, you can expect us to continue to consistently reinvest in our business. We are accelerating investments in 2023, leveraging the strong outlook we see entering the year. Overall, we are exceptionally well-positioned to continue our strong track record of performance and capital deployment over the long term.
This shows the feelings of the CEO and the continued growth of the Trane Technologies business and shareholder return via increased earnings and revenues. Trane Technologies has good growth and will continue as the focus of the pandemic gets controlled by the vaccines distributed worldwide. S&P CFRA just raised its Trane Technologies' one-year price target is $185.00 with a hold rating giving you a possible gain of 1% in a year and making Trane Technologies a fair buy at this time considering the estimated yearly growth. The projected one-year PE is above average at 22, which shows Trane Technologies' prospect of growth. Trane Technologies is a large-cap company with a capitalization of $42.8 billion, well above my guideline target of at least $10 billion. Trane Technologies' 2023 projected increase of 13% in operating revenue is good for a solid growing income for this industrial company.
Trane Technologies does meet my dividend guideline of having dividends increase for 8 of the last ten years and having a minimum of 1% yield. Trane Technologies has a below-average dividend yield of 1.5% and has had increases for ten years of the last ten years, making Trane Technologies a good choice for the dividend growth investor. The 3-year dividend growth rate is 6%, and TT should return to its 5-year dividend growth rate of 9.53% as the COVID virus is controlled. The five-year average payout ratio is moderate, at 33%. After paying the dividend, this leaves cash remaining for increasing the business of the company by expanding its product line, increasing foreign sales, and increasing the dividend, all of which raise the earnings and value to the shareholder. The graphic below shows the balanced approach of the company to increase the business and reward the shareholder.
Capital strategy (4th Quarter earnings call slides)
I have capitalization and growth guidelines where the capitalization must be greater than $10 billion and the growth greater than 7%. Trane Technologies passes these guidelines. Trane Technologies is a large-cap company with a capitalization of $42.8 billion, well above the guideline target. Trane Technologies 2023 projected cash flow from operations at $1.6 billion is excellent, allowing the company to have the means for company growth and increased dividends.
I look for the earnings of my positions to consistently beat their quarterly estimates. For the last quarter, on February 2, 2023, Trane Technologies reported earnings that beat expectations at $1.82 by $0.18, compared to last year at $1.36. Total revenue was higher at $4.07 billion more than a year ago by 14% year over year and beat expected total revenue by $130 million. This was a great report with a bottom-line beating expected, a top- line increase, and a bottom-line increase compared to last year. The next earnings report will be in May 2023 and is expected to be $1.42 compared to last year at $1.12, a nice increase. The graphic below shows a comparison of earnings between 2021 and 2022 for Q4.
4th quarter comparison between 2021 and 2022 (4th quarter earnings call slides)
Trane Technologies manufactures on a global scale heating, ventilation, air conditioning, and refrigeration systems. Overall, Trane Technologies is a good business with a 13% CAGR projected growth as the worldwide economy grows going forward with the increasing demand for TT's industrial products. The good earnings and revenue growth looking forward provide Trane Technologies to continue its growth as the HVAC business increases and foreign sales are expanded . The graphic below shows the guidance for 2023 with Solid revenue and cash flow Improvement.
This shows top management's feelings for the continued growth of the Trane Technologies business and shareholder return with an increase in future cash flow growth. Trane Technologies has good growth and will continue as the world's industrial budgets grow.
One of my guidelines is whether I would buy the whole company if I could. The answer is yes. The total return is good, and the dividend growth makes a good combination of growth and income. The Good Business Portfolio likes to embrace all kinds of investment styles. Still, it concentrates on buying businesses that can be understood, makes a fair profit, invests profits back into the business, and generates a fair income stream. Most of all, what makes TT interesting is the long-term growth of the world economy and industrial budgets, giving you increasing growth.
A qualitative guideline I don't mention often is how you think about your investments. Don't just think of buying shares as pieces of paper but think of yourself as an owner of the company you are and understand its business and how it makes its profit. If you can't understand the business, don't invest in the company.
Risks and Negatives of the business
Trane Technologies has great products, and they keep adding new varieties to existing products and developing new products that increase their sales. Still, there is always the risk of a new product failing. As more businesses and people finally get back to work, Trane Technologies' earnings should continue their steady growth unless they are impacted by new varieties of the COVID virus. There is also always the risk of government regulation that could hurt Trane Technologies' product development and cause a decrease in earnings. The last factor is the exchange rate to the dollar since Trane Technologies has a worldwide business.
Conclusions
Trane Technologies is a good investment choice for the total return investor with its good projected growth as worldwide industrial budgets increase. The company is using its cash to buy bolt-on companies and increase the dividend. Trane Technologies is 7.3% of the Good Business Portfolio and will be held until it becomes 8% of the portfolio. Then it will be trimmed down by 0.5%. If you want a steadily growing total return in the sweet spot industrial business, Trane Technologies may be the right investment for you.
The Good Business Portfolio's total return is ahead of the Dow average from 1/1/2023 to February 10 by 1.61%, which is a gain above the market gain of 2.18% for a total portfolio loss of 3.79%. Each quarter after the earnings season is over, I write an article giving a complete portfolio list and performance. The latest article is titled " The Good Business Portfolio: 2022 2 nd Quarter Earnings and Performance Review and Select Company Reviews”.
For further details see:
Trane Technologies: Buy For Good Total Return, But A Bit Pricey At Present