Source: Investing Published 10/31/2024, 11:41
HSBC on Thursday made a notable change to its outlook on Trane Technologies (NYSE:TT) stock, changing its rating from “buy” to “hold.” However, the bank raised its price target for the company to $405.00 from $355.00 previously. The change comes after a significant surge in Trane stock over the past year, with the stock price doubling. HSBC ’s analysis acknowledges Trane Technologies’ strong performance and potential, citing “a very attractive long-term growth opportunity, excellent execution, and potential to exceed consensus expectations over the long term.” Despite these positive factors, the bank points to the stock’s increased valuation as a reason for caution. Over the past 12 months, Trane’s valuation has increased from around 20 times the next 12-month forward earnings (NTM PE) to 29 times the estimated 2025 earnings multiple.
The analyst believes that the current valuation reflects the valuations of companies with a higher commitment to AI-driven data center growth, a sector where optimism has contributed to the revaluation of Trane’s stock. Given this significant increase in the share price and valuation metrics, HSBC suggests that there is limited potential for further expansion in the multiple. This forms the basis for the decision to downgrade the stock to “hold,” despite the increase in the target price.
The increase in the target price to $405.00, despite the downgrade, reflects the bank’s recognition of Trane’s past achievements and its prospects for continued success. However, the new valuation suggests that the share price growth may not continue at the same rate as in the previous year.
In other recent news, Trane Technologies reported an impressive 11% organic revenue growth in its third-quarter earnings call. The company also saw a significant increase in adjusted EPS and a strong increase in orders and backlog. As a result, Trane Technologies raised its full-year organic revenue and adjusted EPS outlook, reflecting optimism about its continued growth trajectory.
The company’s adjusted EPS increased 21%, with organic orders reaching $5.2 billion and backlog reaching $7.2 billion. The full-year organic revenue outlook was raised to the high single digits, and the adjusted EPS outlook was increased to approximately $11.10. Despite challenges in China’s non-residential markets and an expected 2024 transportation market downturn, the company expects organic revenue growth of approximately 7% and adjusted EPS of approximately $2.50 for the fourth quarter.
These recent developments demonstrate Trane Technologies’ resilience and strategic focus on growth. The company’s solutions are well positioned to benefit from policies such as ESSER funding, particularly for school projects. The Services segment has averaged high single digit growth, with further investments planned to boost revenue collection. The company remains focused on maintaining a strong balance sheet and deploying excess cash over time.
InvestingPro Insights
To complement HSBC’s analysis, recent data from InvestingPro provides additional context on Trane Technologies’ financial position and market performance. The company has a market capitalization of $84.74 billion, reflecting its significant presence in the building products industry. Trane’s P/E of 35.81 is consistent with HSBC’s high valuation comment, supporting a “Hold” rating despite the price target increase.
InvestingPro’s advice highlights Trane’s strong dividend history, having maintained payments for 54 consecutive years and raising its dividend for the past four years. This demonstrates the company’s financial stability and commitment to shareholder returns, which could be particularly attractive to income-focused investors in the current market environment.
The company’s 11.89% revenue growth over the past twelve months and strong 21.09% EBITDA growth underscore Trane’s operational strength, in line with HSBC’s recognition of “excellent execution.” Furthermore, Trane’s impressive one-year total price return of 99.59% underscores the stock’s significant upside noted in the article.