This article is written exclusively for Investing.com
Everyone seems to want to buy the next hot electric vehicle company or the next big biomedical breakthrough. But sometimes it's the mundane industries we take for granted that are undergoing quieter transformations, albeit the ones that will bring serious gains for the profit.
As the current lesson from COVID-19 and the emergence of respiratory disease shows, better filtration for transportation, business and residential use is essential for good health. Add to this that the less developed regions of the world are increasingly able to afford the comfort of humans and to filter pollutants from their outdoors, and we have a growing business.
Modern Equipment: Heating, Ventilation, Air Conditioning, Cooling
Our lives would be far less comfortable and could be in greater danger without heating, ventilation and air conditioning (HVAC), now increasingly referred to as HVACR (heating, ventilation, air conditioning and cooling). It just flows off the tongue just as well, that “R” is a big part of quality of life – as has recently been brought home by the Pfizer (NYSE 🙂 vaccine's need for serious cooling.
Hundreds of millions of people around the world are still toiling in the dead of winter or in the fear of summer without delay of either. Social media is not going to change their lot in life, nor give them a good night's sleep. But better indoor air quality, the assurance of warmth when you need it, and air conditioning on the hottest muggy nights could do the trick.
For those in the most developed countries who already take these things for granted, overcrowded trains, overcrowded buses, and overcrowded airplanes need vastly superior ventilation systems that exchange air more frequently and remove pollutants and slow the spread of disease.
This is all what they do in the seemingly mundane, but actually increasingly hi-tech HVAC world. Which HVAC companies are likely to benefit as the world demands greater comfort, better food safety, and fresh, disease-free air?
According to the Market Research Reports below, seven major manufacturers are the beneficiaries of approximately 90% of all US supplies of HVAC equipment. Under the heading of HVAC, I include dehumidification, cooling, fire safety, air movement and energy recovery as subcategories as these are all manufactured by one or more of these companies looking for more comfort, more safety and more food and air. quality.
There are about 25 such companies worldwide. I'll limit our discussion to the two I own and the one I like the most today for the time being. Both are present worldwide.
One is headquartered in the US, the other in Japan (and has US ADRs).
Major Global HVAC Companies
Source: Market Research Reports
Let's take a look at each of these two:
Carrier Corp (NYSE 🙂 became a standalone publicly traded company after being split off from United Technologies (NYSE 🙂 on April 3, 2020.
I purchased the stock for our Investors Edge® Growth & Value Portfolio on June 11th. Since then it has risen by 80.4%.
Carrier is arguably the best-known name in the industry for US investors. Like many brilliant inventions that led to the birth of a beautiful company, this one bears the name of the founder. Willis Carrier invented modern air conditioning in 1902. In 1915, he and six fellow engineers raised a total of $ 32,600 to form the Carrier Engineering Corporation. The rest is history. He and his co-investors / founders / engineers realized that to really cool a space you had to control not only air circulation, but also humidity and temperature. And it would be ideal to clean the air while it is being recirculated through some sort of filter. Temperature, humidity, ventilation and cleaning – voila! You have today's air conditioner.
I think Carrier's future is brighter than ever today. Sadly, for those considering buying now, I think it's almost reasonably priced. Still, it's worth finding out in case the outlook changes radically for the better and as a basis of comparison for the company I bought more recently that I think will see a similar price increase.
Carrier derives approximately 60% of its revenues from commercial installations and 40% from residential installations.
This is not uncommon for large HVAC companies. What makes Carrier different is that only about half of its business comes from HVAC and the other half from a combination of fire and security products, installation and maintenance, and refrigeration equipment and service.
With 85% of Carrier's sales in the US and Europe, I see an opportunity to expand into many of the fast-growing developing countries that are particularly in need of refrigeration and air conditioning. When I was a defense attaché in Myanmar (Burma), I saw so much spoilage, so much downtime in the afternoon. It's amazing what a difference something we take for granted HVAC (+ R!) Could make in countries like this.
Daikin: Better Priced Rival
While I really like Carrier, I like its bigger rival (worldwide) at the current price even better. HVACR may not seem like the sexiest industry, but I believe that both Carrier and Daikin Industries (OTC 🙂 will see sales growth as a result of the confluence of climate change, the perception of even greater climate change, the growth of the middle class in emerging markets, and increasing urbanization everywhere, making installations easier and cities hotter. Black roads, black roofs, black cars, etc. all carry heat to these areas. The lighter colors of rural and agricultural areas, not so much.
In the developed world, our latest fury over the Internet of Things will most likely favor those HVACR companies that have the deep pockets to upgrade and digitize to prioritize commercial adaptation and living comfort. And it's not just the House of Representatives and the Electoral College that will change as more people give up the internal politics of states like California and New York, both of which are losing population lately.
Those who leave seem to go mainly to Florida, Arizona, Nevada (go south please; we farmers in the countryside and farmers in the north have plenty of people already!), New Mexico, Texas and the Ozarks. These are places that have a clear need for temperature and humidity control.
In addition, the latest cloud data centers are just one example of an entirely new industry that requires a prescribed temperature range to function. They cannot rely on ambient temperatures to protect their expensive investments.
Let's talk a little more about Daikin Industries
Daikin was founded in 1924, just 11 years after Willis Carrier started its business. Daikin supplied high quality products in Japan and the rest of Asia and did not enter the North American market until 2004. However, it did so on a large scale with the purchase of McQuay International, an American company almost as old as Carrier itself. , which designed, manufactured and sold commercial, industrial and institutional heating, ventilation and air conditioning products.
That same year, Daikin purchased OYL Industries. DKILY immediately started introducing breakthroughs in the Japanese production line and advanced technologies developed in their home markets.
To pursue their acquisition strategy, Daikin acquired Goodman Global in 2012 and opened Daikin Texas Technology Park just three years ago, the third largest plant in the United States (behind the Tesla Factory (NASDAQ :), currently in Fremont CA and Boeing & # 39; s (NYSE 🙂 Everett Washington plant.)
Located just outside of Houston, Texas Technology Park makes it easy for Daikin to bring together manufacturing, engineering, logistics, marketing and sales for Goodman®, Amana® and Daikin brand heating and air conditioning products in one location .
If you've ever spent a summer in southeast Texas, you know that Daikin must have great confidence in its products; it relies on them to keep the temperature where it is needed for production at that location!
Source: https://daikintexastechnologypark.com/page/aboutekenen19459003]
Note: Amana’s HVAC business was acquired as part of Daikin's purchase of Goodman Global
Daikin, like so many Japanese industrial and manufacturing innovators, has its finger in many cakes. As I see them succeed in Africa, the Middle East, their own backyards in East and Southeast Asia, I also see their studied entry into the Americas paying off in the HVACR business. Already the biggest, I think they still have the best runway for future growth.
However, Daikin is not only concerned with HVACR. Yes, they are the biggest factor in residential air conditioners and air cleaners, commercial air conditioners and air cleaners, air handling units for humidity external air handling units, large chillers, refrigeration units for sea containers and marine vessels. air conditioners. But buying DKILY shares also gives you a number of other major subsidiaries.
Daikin is an innovator and patent holder in a number of chemicals and downstream products, such as hydrofluorocarbons and fluoroplastics. fluorine coatings, fluoroelastomers, mold release agents, oil and water repellants, pharmaceuticals (!), semiconductor etching machines, industrial hydraulic equipment and systems, and even in defense systems.
Long ago I had the pleasure of working with the JSDF (Japan Self-Defense Forces). Since then I have followed their progress. The JSDF, which lives next to China, must always be vigilant and prepared. The Japanese government mainly gets its self-defense weapons from its own industry and its most trusted allies.
Daikin is one of those homegrown manufacturers. It supplies small arms and heavy weapons, warheads, grenades and other explosives, aircraft parts and medical equipment to the JSDF.
Returning to the HVACR side of the business, which continues to provide most of the company's sales and revenues, Daikin's relatively recent positioning in the US market could not have come at a better time. With the rates being so low, I think home construction will continue to crack through 2021 – and Daikin will be one of the main beneficiaries of new construction. Then of course there is the retro fit market for those who want the greener, newer and more efficient HVAC equipment, as well as inverters for solar and other applications.
While I see, at least in the coming years, a high demand for new build and retrofit demand in the US, the real market is in the rest of the world where there is currently little or no air conditioning.
According to the latest figures (2020), there are less than 2 billion air conditioning units in the world. These are mainly concentrated in the United States, China, Japan and South Korea. Projections from the International Energy Agency (IEA) predict an increase to 5.5 billion units worldwide by 2050. If powered by renewable electricity sources, I can see a world where the IEA figures could be on the low side.
Also from the IEA: As of 2019, of the 2.8 billion people living in the hottest parts of the world, only 8% currently have air conditioning. India is predicted to be the most populous country in the world for the next decade, with places like near-equatorial Nigeria and equatorial Indonesia not far behind. The market potential here is astounding.
I think Daikin is in the catbird chair for those willing to adopt a long-term vision, by which I mean longer today than next Tuesday. US ADRs average daily volume of 90,000 shares plus, so liquidity is not an issue.
Daikin's annual year ends in March. Here are the estimates of the 16 analysts worldwide who track the company for revenue estimates.
Source: Seeking Alpha
Over the past 5 years, Daikin has provided a fine performer. It's been a bit interrupted in the last month. I already have it, but for all the reasons mentioned above I would like to add this withdrawal.
Warning: Unless you are a Stanford Wealth Management customer, I do not know your personal financial situation. Therefore, I am offering my opinion above for your due diligence and not as advice to buy or sell specific securities.
