Individual Business Analysis- SWOT Analysis

February 12, 2012
MGT/521

Abstract

This paper is taking a financial look at Lennox International and conducting a SWOT analysis on Lennox International to get obtain a better understanding the amount of risk that would be associated with an investment firm potential investing in Lennox International. This paper is solely based off the facts published from Lennox International and other creditable financial sources.

As the manager of a small investment company we are carefully considering the investment into Lennox International. We are going to examine the current status of Lennox International and come up with a conclusion based on performance to decide whether or not to invest into the company. Our investment firm primarily looks to invest into a company to turn a quick profit, we will take a marginal amount of risk but nothing to steep, and we tend to stay away from emerging markets and a superior amount of risk.

Lennox International (NYSE:LII)

Lennox International is a manufacturer in the heating, ventilation, and air conditioning (HVAC) industry. Lennox International focuses on four main areas; residential heating and cooling, commercial heating and cooling, service experts, and refrigeration. Lennox manufactures under other brand names such as: Armstrong Air, Ducane, Aire-Flo, AirEase, Concord, Magi-Pak, and ADP. Their product portfolio is quite wide and offers an array of choices with Lennox brand, the flagship brand.

Lennox International is known for their residential air conditioners and furnace products, some may associate Lennox with the commercials seen on TV featuring “Dave Lennox” Dave Lennox is the face associated with Lennox, who was the founder of Lennox back in the late 1800’s.

Lennox International is traded on the New York Stock Exchange (NYSE) under the ticker symbol LII. The three main holders of Lennox International are institutions, which Wellington (6.2M) and Fidelity (4.0M), mutual fund holders: Hartford MidCap Fund (1.4M) SPDR S&P (1.2M), and private major holders which most are executive management past and present of Lennox International.

`Lennox International is currently trading for $39 per share. Lennox International has been floating around this price for roughly the past 30 days. One year ago, Lennox was trading around the $50 per share mark; in the second quarter of 2011 the price began to decline all the way down to the $25 per share mark where it tanked out at $24.37 in September 2011, every since it has been on a rise to where it currently sits today. The current volume for Lennox International 406.3M shares, which is low compared to the past year. Lennox International has set a trend of 500M -800M shares, with a market cap of two billion shares. Institutional ownership accounts for roughly 60.46% of the ownership of Lennox.

Looking at the past performance of Lennox International over the course of the past ten years, Lennox International has made some great progress. In 2000, the average price per share was around the $25 per share. Since 2000 the price has steadily increased, even during the recession, Lennox International continued to outperform the S&P 500.

This steady increase can be attributed to the increase demand for HVAC components in both residential and commercial. In the residential sector, government tax breaks for the purchase of high efficient furnaces help spike sales, these tax credits ceased at the end of 2010. Also the phase-out of R-22 refrigerant also spike demand for R-22 air conditioner products. Both of these two factors helped drive the price of Lennox International above the S&P 500 average.

The Clean Air Act and Business

In 2009 Lenox International experienced the most significant increase in price per share and volume, this trend can be accredited to the international treaty, which is entitled Montreal Protocol, which has enacted The Environmental Protection Agency to phase-out R-22 refrigerant under The Clean Air Act, the ruling was based on R-22 refrigerant is a hydro-chlorofluorocarbon (HCFC) compound. The elements in HCFC have been proven to deplete the ozone, making it very environmentally unfriendly.

However, there has been a loophole in The Clean Air Act, allowing HVAC manufactures to still manufacture R-22 components, just not allowing them to ship them from the factory charged with R-22. These components are intended only for “replacement components” only. There has been much discussion of this loophole with the EPA and Department of Energy. This loophole could be closed within the year resulting in another increase for these units prior to their demise. This can greatly impact sales for 2012; this can potential result in higher revenue from sales further resulting in an increase of stock price per share, which could mimic the growth that was experienced in 2009.

Although Lennox International was one of the pioneer manufactures to cease the production of R-22 units and to convert over to R-410A, which is environmentally friendly. Lennox International still manufacturers and sells R-22 units, now called “flat” units. These sales still account for a major portion of the business. However, Lennox International is trying very hard to cease all R-22 units and move over to R-410A, because current market demands R-22 sales continue to grow. This key concept can potentially drive up the stock price for the profit margin that we are looking to invest in.

The Performance of 2011

Lennox International missed their estimates on revenues for the fourth quarter of 2011 by $40M, this indicates sales were not as strong at they thought they were going to be, forecasting was off. Sales were down by nearly 1% compared to the third quarter of 2011. This can be a result of the uncertain economy, mild winter resulting in less replacement heating equipment.

Lennox International experienced an excellent third-quarter of 2011, sales and revenue both exceeded the project revenue. The stock price reflects this in the third quarter of 2011 as the price per share started to have significant amount of growth. This can be contributed to the longer lasting summer and extensive heat waves.

While the rest of the year, targets were missed slightly, this is an example that Lennox International did not meet their financial goals set-fourth in 2011, which one can use to judge if Lennox International will meet their financial goals in 2012, and use this information to use when determining to invest money into the organization.

According to Todd Bledorn, the CEO of Lennox International overall HVAC business was down in 2011, which resulted from the US Government not offering tax credits for high efficient equipment and the re-emergence of minimum-efficiency condensing units (R-22 Units) Bledorn also indicated that while sales were down in the residential sector, sales were up 10% in the commercial and 5% in the refrigeration sector.

The primary decline in the residential sector can be attributed to Lennox International was not ready for the remerge of R-22 condensing units, Lennox International like many other players in the HVAC industry were already set to move forward to the new high-efficient equipment, they were forced back into the R-22 business by the competition in the industry. This resulted in fewer sales as product was not readily available to the consumer. We really need to take this into consideration when reviewing the investment decision, Lennox International missed their mark, however, the market went backward than projected, this not only affected Lennox International, it affected all the major players in the HVAC world.

When one compares the years of 2010 to 2011, it can appear that Lennox International went backward, this is attributed to many factors, including the end of the 2010 tax break, 2011 price increase, warm summers, and cold winters. All of these drove a pull-forward sales increase. While this resulted in strong fourth-quarter 2010 results, it resulted in a decrease in sales in 2011. The stock price indicates this. However, Lennox International experienced an increase of $3.3 billion in revenue, which is a 7% increase form the prior year.

2012 Optimistic Year

According to “the NEWS” which is a major publication of the HVAC industry, the sales forecast for 2012 is going to increase significantly form the year 2011. The majority of HVAC manufactures are expecting to have better year than 2011 despite the concern of the global economy. While the strongest areas of demand for HVAC equipment is in favor of Lennox International, sales are expected to grow 24% for light commercial units, 13 for industrial equipment, 26% for residential, and 26% for institutional equipment. Lennox Industrial is a major player in many of these sectors, these gains are quite significant, and Lennox International can easily capture a good portion of these sales.

Lennox International has posted several financial guidelines for the year 2012, it expects organic growth of two-six%, neutral impact from foreign exchange which for years companies had been losing money due to foreign exchange rates, in 2011 Lennox International experienced a favorable two-point gain due to foreign exchange rates.

Lennox International is expecting a stock repurchase of $50M, which according to Investopedia.com a company will buy-back stocks from the open marketplace, which reduces the amount of stocks on the open market. This strategy is an effort to raise the price per share, as management of the organization believes that the price is undervalued.
This is just another example of supply vs. demand, which can significantly increase the price per share as there will be fewer shares available for purchase. This is another key indicator that the price per share has potential to climb in 2012.

Lennox International is expecting to produce a $2.20-$2.60 rate increase per share, if this is true were true today this would increase the price of the stock to around the $41-41 dollar price or an increase of 6%. If we were to invest money into Lennox International it would be a considerable safe bet we could expect a return on invest of 6% in a normal market. However, I would not be willing to rest my hat on this statement. We need much more data to conclude if Lennox International is a safe investment or not.

|SWOT Analysis |
|Strengths |Weaknesses |
|Manufacture a high quality product in the United States |Management |
|Recognized name “solid” in HVAC “Dave Lennox” |Technological Skills |
|One of the oldest HVAC manufactures |Expensive labor pool |
|Customer Loyalty |Aging Factories |
|Management |Service Department |
|Technological Skills |Compromise of components |
|Solar Power |Warranty Claims |
|Wide array of product offered |Old Technology |
|Research and Development | |
|Workforce | |
|Opportunities |Threats |
|Increase sales forecast HVAC 2012 |Changing Government Policies |
|Changing customer taste |Unemployment |
|Changing Government Policies |Housing foreclosure |
|Solar Tax Credits |Tight credit market |
|New Construction on an increase |Technicians available |
|Aging HVAC equipment |Foreign exchange |
|Population growth |Soaring cost of raw material |
|Air quality |Competition from “value” brands |
|Necessity of HVAC |Changing markets to price sensitive |
|Solid processes |Product recalls |

Decision – Invest or not

After reviewing the data, we have decided that Lennox International does not offer the return on investment that we look for in an investor. Lennox International seems like a mild risk organization that will make money but as fast as we would like.

We make this decision based on the following:

Economy- The average consumer is not looking to replace their HVAC equipment, times are very tough right now, employment is up, new construction is down, credit is tight, and houses are still getting foreclosed on.

Competition- Lennox International seems to be losing market shares to the competition, Lennox International is lacking a product in the “value base” sector, something that is price reasonable that offers a good warranty. This decision also traces back to the economy and what the average consumer looks for in their buying decision.

Commodities- The commodities market is continuing to increase, despite the recent decrease in copper, we feel that significant evidence shows that these prices of metals (i.e. copper, steel, aluminum, etc..) will continue to rise, which will increase the cost of goods sold, decreases the profit margin. We feel that Lennox International did have a great enough product cost increase to cover these cost increase.

Government Policies – With the government reducing the amount of tax credit for the purchase of new energy efficient components resulted in and continues to result in a decline of new energy efficient HVAC equipment, also played heavily on our decision. There has been steep decrease in the amount of new equipment purchases as result of the government allowing R-22 “flat” units to still be manufactured and sold in the United States, resulting in a decrease of total unit replacements. After studying the market, we feel with the economy in the recession mode, the government is going to allow the flat units to still be manufactured to help the consumer.

However, we would like to recommend Lennox International to our sister company – who makes long-term mutual fund investor. They like to investment into organizations that offer none to slight risk, where there will be a return on investment, this organization is more scaled for retirement funds and conservative investments. Lennox International is a great long-term investment, as the economy makes a rebound.
Conclusion
The decision to invest in Lennox International was not in the best interest of the investment firm. The decision was based off the data retrieved from Lennox International and other creditable financial sources.

References

Lennox International Announces 2012 Financial Guidance. (2012). Retrieved February 11, 2012, from http://www.lennoxinternational.com/investerrelations

Lennox International Reports Fourth Quarter and Full Year Results. (2012). Retrieved February 11, 2012, from http://www.lennoxinternational.com/investerrelations

Summary for Lennox International, Inc. Comm (LII). (2012). Retrieved February 11, 2012, from http://finance.yahoo.comq?s=LII&q1=1

Jayson, Seth (2012, February 6). Lennox International Beats on EPS but GAAP Results Lag. Retrieved February 09, 2012, from http://www.fool.com/investing/general/2012/02/06/lennox-international-beats -on-eps-but-gaap-result.aspx

Summary for Lennox International, Inc. Comm (LII). (2012). Retrieved February 11, 2012, from http://finance.yahoo.com/echarts?s=LII+Interactive

Nelson, Gabriel (2011 August, 18). EPA’s Planned Pheaseout of Harmful Refrigerant Hits Snag. Retrieved February 11, 2012, from http://www.nytimes.com/gwire/2011/08/18/18/18greenwire-epas-planned-phaseout-of -harmful

Industry Optimistic for New Year. (2012). Retrieved February 09, 2012, from http://www.acgrbes.com/articles/print/118401

Search Investopedia. (2012) Retrieved February 11, 2012, from http://www.investopedia.com/terms/s/sharerrepurchase.asp