What happened
Shares in premium heating, ventilation, and air conditioning (HVAC) company AAON (AAON -1.03%) rose 19.2% in February, according to data provided by S&P Global Market Intelligence. The move comes mainly from an excellent set of fourth-quarter 2022 earnings that dispelled fears investors might have had over its trading conditions.
Specifically, AAON operates in the commercial, industrial, data center, and cleanroom end markets. However, the company is relatively less exposed to the residential HVAC market compared to other providers. Given the pressure homeowners face in the rising rate environment, that's a good thing right now. For example, its competitor Carrier's residential and light commercial HVAC orders declined 30% in its fourth quarter, and Trane's residential HVAC bookings in the Americas were down by a mid 20% percentage in the fourth quarter.
Still, Carrier's commercial HVAC orders were up by over 10%, and Trane's Americas bookings were up by a low-teens percentage.
The tale of two HVAC markets continued with AAON reporting strong orders and backlog -- organic bookings were up 45%, and its backlog grew a whopping 110% on a year-over-year basis in the quarter. In fact, as management noted on the earnings call, "Our biggest challenge right now continues to be ramping up production fast enough."
So what
AAON's management argues that nonresidential construction data remains strong, and it's not seeing any sign of a slowdown in its end markets. Moreover, the price increases pushed through in 2022 should flow into its profit margins as it delivers on its backlog in 2023.
That said, a lot of commercial construction activity tends to lag behind residential construction activity. For example, commercial facilities tend to be built around expanding housing communities. Moreover, they may well be a pull forward in orders from customers due to the difficulty in fulfilling orders in the current environment due to ongoing supply chain issues.
Now what
As ever, investors need to watch the overall economy. A protracted period of weakness in housing, caused by rising rates, will inevitably have some impact on AAON's commercial markets.
On the other hand, demand for commercial HVAC has strengthened in recent years because of regulatory requirements around emissions and increased awareness of the need for healthy, clean buildings. Don't be surprised if AAON has another strong year in 2023.
