Residential HVAC Profits Should Be Resilient As Volumes Dip
![Air conditioning vent representing residential HVAC equipment.](https://s33007.pcdn.co/wp-content/uploads/2023/04/Website-Image_Wide-general_air_conditioner_gettyimages_182731481.jpg)
The severity of a C23 unit drop in North American residential HVAC is an investor debate, given its importance to OEM profits (89% at LII; ~30% at CARR; 25% at TT). North American residential HVAC OEM profits are likely to rise in C23 even as volumes drop. We don’t expect volumes to “mean-revert” to the pre-COVID trend line but we do expect a shallower drop than feared and an area of resilience vs. other industrial sectors.
The projected North American residential HVAC unit volume drop in C23 will be less onerous to HVAC OEM profits than is feared. That is, we believe North American residential HVAC unit volumes will fall Y/ Y in C23, but at a less severe rate (i.e., investors fear a ≈10-15% unit drop; we assume 5%) than feared. This is due to many factors such as repair vs. replace economics, a limited opportunity to prebuy ahead of SEER change, the notion that macros aren’t terrible, and a shorter HVAC system life expectancy. HVAC OEM profits from North American residential markets will likely be flat in C23, even if volumes fall more sharply than we assume. This is also precipitated by commodity deflation, richer mix (SEER mandate effective on 1/1/23), and higher prices that should hold due to a disciplined and attractive industry structure.
We incorporate market pricing by SEER for residential HVAC products, our pre-COVID model of expected annual residential shipment gains, and other data (input costs; repair vs. replacement trade-offs) to support our thesis.