Dear Mr. Berko: I have $2,000 to invest. Please tell me about Lennox, the company that makes that lovely china and our faithful home air conditioner. Do you think its value can increase? — LJ, Waterloo, Iowa
Dear LJ: Lennox Corp. is a Bristol, Pennsylvania, company that makes tableware and glassware — with pieces so beautiful, elegant and exquisite that they have graced our embassies the world over and have been used as serving pieces at the White House since 1918. Lennox’s hand-blown lead crystal pieces have become highly desirable collectors’ items, and prices for some stemware are out of sight. In 1999, the Environmental Protection Agency decided to have a hissy fit. The dunderheads at the EPA told Lennox to get the lead out of its glassware, or else! They reasoned that lead was poisonous for those who’d drink from Lenox stemware and hazardous to the Lenox employees. In the process, the EPA buffoons spent $167 million (guesstimate) presenting thousands of pages of testimony to support their decision. Try as it might, Lennox could not find a formula to make glass of the same quality without lead. Therefore, in 2002, the EPA forced Lennox to close a New Jersey factory and pink-slip 358 employees. The EPA strikes again!
Morgan Stanley took Lennox public in July 1999 at $18.50 a share. Lennox International Inc. (LII-$191.07) is a $3.6 billion-revenue manufacturer of heating, ventilation, air conditioning and refrigeration equipment for the residential, commercial and industrial market. Lennox divides its business into three segments: Residential heating and cooling generates 55 percent of revenues; commercial heating and cooling (restaurants, office buildings, large retail stores) generates 25 percent of revenues; and refrigeration accounts for 20 percent of revenues. In fact, many of the supermarket display cases carrying your favorite brands of ice cream and other frozen foods have the Lennox imprimatur.
Air conditioning, heating and refrigeration is an unexciting, dirty, sweaty and stinky business. But by the hair on my chinny chin chin, it’s also enormously profitable. The Great Recession was officially over in June 2009. In 2011, LII was trading at $25 a share, and revenues were $3 billion. Net profit margins were 2.7 percent. Return on total capital was 10.6 percent. The dividend was 72 cents, and share earnings were $1.65. Then, for unknown reasons, the folks in management found religion. They got off their fundaments and began to manage. By 2016, revenues had grown to $3.6 billion. Net profit margins had marched to 8.2 percent. Return on total capital had improved to 48 percent. The dividend had segued to $1.58 as earnings sailed to $6.95 a share. And then management announced that it was going to buy back nearly 2 million shares.
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LII’s product reputation is rock-solid. Post-recession demand continues strong this year and most likely will next year. Revenues for 2017 should reach $3.9 billion, and improved cost controls could increase net profit margins to 8.8 percent. Therefore, LII expects to report a 12 percent increase in share earnings, to $7.85, and may increase the dividend to $1.74. And 2018 looks even better, with projected net profit margins of 9.2 percent, projected earnings of $8.95 a share and a possible $2 dividend.
However, I’m concerned that the post-recessionary bounce in LII’s business may be a little long in the tooth. Big-box retailers are opening fewer stores (many are closing stores), and housing starts in the U.S. concern me. Also, LII’s international business (Europe and China) could be subject to a border adjustment tax under the Trump administration. I’m concerned that the 166-point run-up in price since 2011 may encourage LII’s officers and directors to sell their shares. And indeed, some have. Todd Bluedorn, chairman of the board and president, sold 34,000 shares recently, and several other officers have sold over 30,000 shares during the past few months.
Some believe that LII has the power to reach $210-$230 in the next 18 months. I think the risk of ownership at the current price outweighs the potential for gain, but if you want to reach for the $210-$230 level and a possible split, you have enough cash to buy 10 shares.
Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at email@example.com.