Quantitative Framework for Assessing Commercial HVAC Demand

THE TD COWEN INSIGHT

We offer a quantitative framework for assessing how commercial HVAC (CHVAC) equipment demand might trend over the next 2-5 years. We conclude that CHVAC equipment will see a 7-10% rise through C23-24, and that then growth will slow, but to a higher underlying growth rate than was the expectation before 2020.

ASSESING CHVAC GROWTH IN C22+

The HVAC stocks have caught a CHVAC “narrative” rooted in a directionally positive, but heretofore unquantified, CHVAC demand outlook, which investors suspect will benefit from emerging secular trends such as indoor air quality (IAQ) upgrades, infrastructure stimulus, & ESG goals, as well as a catch-up of pent-up demand. The sector’s multiple has lifted on the CHVAC narrative, and now investors are debating whether the CHVAC narrative is valid. Our quantitative CHVAC equipment demand framework suggests that consensus HVAC estimates are credible, so long as other HVAC areas (e.g. resi; transport refrig) cooperate.

METHODOLOGY

We isolate for two factors:

1) an “underlying” CHVAC equipment growth rate based on secular/cyclical dynamics

2) a catch-up of deferred CHVAC replacement/pent-up equipment demand from the 2020 COVID trough

We conducted this analysis across two CHVAC markets, Unitary and Applied. Since the 2020 sales declines for Unitary and Applied differed, growth drivers in C22+ will differ between them, and the relative exposures to each category differs by HVAC OEM. To be clear, this framework tries to isolate for CHVAC equipment demand only, and does not attempt to address CHVAC service/solution demand, which is sizable for most of our HVAC stock universe.

MATH SUGGESTS HSD% CHVAC GAINS THROUGH C24

CHVAC should see a fairly steep demand uptick (8-10%) over C22-23 as pent-up demand catches up. Then growth should slow, but to a higher underlying trend line than was the expectation before 2020. Growth in the Applied and Unitary HVAC markets may average HSD% (7-8%) even if it takes until 2024 for pentup demand to catch up. The long-term growth rate will likely be higher for Applied than for Unitary, although the pent-up demand catch-up should be sharper for Unitary early on since Unitary fell by a larger percent in C20 than did Applied.