On Monday, CFRA adjusted its stance on Trane Technologies (NYSE:TT), downgrading the stock from Hold to Sell, despite raising the price target slightly to $332 from $331. The firm's analysts cited a valuation concern, noting that the shares are trading at a significant premium compared to historical averages.
The new price target of $332 represents a modest increase from the previous $330, based on a forward Price-to-Earnings (P/E) ratio of 28 times CFRA's 2025 earnings per share (EPS) estimate. This estimate suggests a stock value of $357 when combined with the results of a Discounted Cash Flow (DCF) model. The DCF model assumes a terminal growth rate of 2.5%, a Weighted Average Cost of Capital (WACC) of 8.6%, and a 10-year Free Cash Flow (FCF) Compound Annual Growth Rate (CAGR) of 12.7%, which yields a value of $308.
CFRA has also updated its EPS estimates for Trane Technologies, raising the 2024 forecast by $0.20 to $10.99, and the 2025 estimate by $0.70 to $12.75. The firm acknowledges the company's potential for strong sales and EPS growth in the coming years, driven by factors such as the refrigerant transition mandated by the Environmental Protection Agency (EPA), robust replacement markets, and solid nonresidential growth, particularly in data centers.
Despite these positive growth prospects, CFRA has decided to downgrade the stock to Sell. The firm points out that Trane Technologies' shares have experienced a significant run-up and are currently trading at a forward P/E of around 31.5 times. This valuation is approximately 39% higher than the stock's three-year historical average P/E ratio. CFRA believes that even when considering the expected strong growth, the current market premium is excessive.
In other recent news, Trane Technologies has reported significant strides in financial performance. The company's Q2 growth was robust, with a 5% sequential and 19% year-over-year increase in bookings, reaching a record $5.3 billion. Organic revenues grew by 13%, contributing to a 23% rise in adjusted earnings per share (EPS). Based on these results, Trane Technologies raised its full-year revenue and EPS guidance, now expecting around 10% organic revenue growth and an adjusted EPS of approximately $10.80.
In addition, Baird has revised its outlook on Trane Technologies, raising the price target to $408 from the previous $376 while maintaining a neutral rating. This adjustment comes as Baird acknowledges stronger trends in the Commercial and Residential HVAC sectors in the Americas. Mizuho also maintained its neutral rating on Trane Technologies, highlighting the company's specialized approach and expertise in thermal and climate solutions.
Morgan Stanley (NYSE:MS) initiated coverage on Trane Technologies, assigning an overweight rating and emphasizing its strong growth prospects. The firm sees potential for mid-single-digit upside and reinvestment into business innovation, particularly in advancing energy efficiency.
InvestingPro Insights
Adding to CFRA's analysis, recent data from InvestingPro provides further context to Trane Technologies' (NYSE:TT) current market position. The company's market capitalization stands at $88.95 billion, reflecting its significant presence in the Building Products industry. Trane's P/E ratio of 38.63 aligns with CFRA's observation of a high valuation, trading at a premium compared to historical averages.
InvestingPro Tips highlight that Trane Technologies has raised its dividend for 4 consecutive years and has maintained dividend payments for an impressive 54 consecutive years. This consistent dividend policy may appeal to income-focused investors, despite the relatively modest current dividend yield of 0.86%.
The company's financial performance remains strong, with revenue growth of 11.97% in the last twelve months and an EBITDA growth of 23.68% over the same period. These figures support CFRA's projection of continued growth potential.
Investors considering Trane Technologies should note that InvestingPro offers 17 additional tips for this stock, providing a more comprehensive analysis for those seeking deeper insights into the company's prospects and valuation.
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