MKM Partners Initiate Coverage On Lennox International

MKM Partners initiate coverage on Lennox International LII with a Buy rating and $49 PT Despite meaningful to-date progress, MKM believes LII's productivity initiatives are largely underappreciated into next year and should support upward earnings revisions at the company's December analyst meeting, when it provides initial 2011 guidance. In total, we believe LII will carry more than $50 million of gross cost savings into 2011, equating to more than $0.60 of EPS. Price/cost headwinds should absorb some upside, but we expect a manageable level of uncovered inflation MKM believes residential HVAC shipments will maintain solid momentum in 2011 at a mid- to high-single-digit growth rate even without a meaningful improvement in repair behavior. We believe early consensus expectations looking for moderating growth are overly bearish. LII's differentiated commercial franchise should carry 2010 momentum into 2011 as construction begins to recover. The 12-month price target of $49 is based on a 2011E P/E of approximately 16x, which compares to the company's historical range of 12x-18x. We believe positive earnings catalysts through internal initiatives support a multiple above the peer group, which currently trades at a 2011E P/E of 15.8x. LII closed Thursday at $41.44