Lennox International's Growth Prospects: KeyBanc Upgrades to Overweight Amid Strategic Pricing and Distribution Focus

KeyBanc Capital Markets analyst Jeffrey D. Hammond upgraded the rating of Lennox International, Inc. LII to Overweight from Sector Weight, with a price target of $355. 

The analyst applauds Lennox International's pricing strategies focusing on decentralized approaches to win in the local market and improve pricing on its National Accounts business. The company gives more weight to regional managers to more adeptly manage pricing at local levels, the analyst notes.

The company's focus on distribution to become more of a profit center is likely to bolster growth ahead, the analyst notes, mentioning improved utilization of its distribution footprint that will drive non-equipment sales through its channel. 

Further, the company's direct-to-dealer model is expected to remain "more insulated" than peers from de-stocking pressures (~80% Res'l sales through company-owned distribution).

These apart, Hammond forecasts ample runway for improved factory efficiency as Lennox International re-enters the emergency replacement market. The move highlights a clear line of sight to ~$100M+ EBIT improvement, providing meaningful earnings tailwinds. 

Lennox International will also gain from incremental capacity in Mexico that will boost outgrowth and margins.

On the commercial front, the company has repriced some backlog and taken incremental prices, significantly contributing to margins moving forward, Hammond notes. 

Overall, the analyst maintains a 2023 EPS estimate of $15.30 and a 2024 EPS estimate of $16.85. The analyst expects formal guidance to move higher following 2Q23 earnings and see an upside to consensus numbers.

Price Action: LII shares are trading higher by 0.25% at $304.15 on the last check Monday.