Lennox (LII)

Climate control solutions innovator Lennox International (NYSE:LII) missed Wall Street’s revenue expectations in Q3 CY2025, with sales falling 4.8% year on year to $1.43 billion. Its non-GAAP profit of $6.98 per share was 2% above analysts’ consensus estimates.

Company Overview

Based in Texas and founded over a century ago, Lennox (NYSE:LII) is a climate control solutions company offering heating, ventilation, air conditioning, and refrigeration (HVACR) goods.

Many HVAC and water systems companies sell essential, non-discretionary infrastructure for buildings. Since the useful lives of these water heaters and vents are fairly standard, these companies have a portion of predictable replacement revenue. In the last decade, trends in energy efficiency and clean water are driving innovation that is leading to incremental demand. On the other hand, new installations for these companies are at the whim of residential and commercial construction volumes, which tend to be cyclical and can be impacted heavily by economic factors such as interest rates.

Other companies offering heating, ventilation, air conditioning, and refrigeration (HVACR) goods include Carrier Global (NYSE:CARR), Trane Technologies (NYSE:TT), and Johnson Controls International (NYSE:JCI)

A company’s long-term sales performance can indicate its overall quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Over the last five years, Lennox grew its sales at a decent 8.2% compounded annual growth rate. Its growth was slightly above the average industrials company and shows its offerings resonate with customers.

We at StockStory place the most emphasis on long-term growth, but within industrials, a half-decade historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. Lennox’s recent performance shows its demand has slowed as its annualized revenue growth of 4.2% over the last two years was below its five-year trend.

We can better understand the company’s sales dynamics by analyzing its organic revenue, which strips out one-time events like acquisitions and currency fluctuations that don’t accurately reflect its fundamentals. Over the last two years, Lennox’s organic revenue averaged 6.4% year-on-year growth. Because this number is better than its two-year revenue growth, we can see that some mixture of divestitures and foreign exchange rates dampened its headline results.

This quarter, Lennox missed Wall Street’s estimates and reported a rather uninspiring 4.8% year-on-year revenue decline, generating $1.43 billion of revenue.

Looking ahead, sell-side analysts expect revenue to grow 6.1% over the next 12 months. Although this projection implies its newer products and services will fuel better top-line performance, it is still below the sector average. At least the company is tracking well in other measures of financial health.

At StockStory, we prefer high gross margin businesses because they indicate the company has pricing power or differentiated products, giving it a chance to generate higher operating profits.

Lennox’s unit economics are better than the typical industrials business, signaling its products are somewhat differentiated through quality or brand. As you can see below, it averaged a decent 30.4% gross margin over the last five years. That means for every $100 in revenue, roughly $30.43 was left to spend on selling, marketing, R&D, and general administrative overhead.

In Q3, Lennox produced a 32.8% gross profit margin, in line with the same quarter last year. On a wider time horizon, Lennox’s full-year margin has been trending up over the past 12 months, increasing by 1.5 percentage points. If this move continues, it could suggest better unit economics due to some combination of stable to improving pricing power and input costs (such as raw materials).

Lennox has been a well-oiled machine over the last five years. It demonstrated elite profitability for an industrials business, boasting an average operating margin of 16.7%.

Looking at the trend in its profitability, Lennox’s operating margin rose by 4.7 percentage points over the last five years, as its sales growth gave it operating leverage.

This quarter, Lennox generated an operating margin profit margin of 21.7%, up 1.5 percentage points year on year. The increase was encouraging, and because its operating margin rose more than its gross margin, we can infer it was more efficient with expenses such as marketing, R&D, and administrative overhead.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Lennox’s EPS grew at an astounding 20.1% compounded annual growth rate over the last five years, higher than its 8.2% annualized revenue growth. This tells us the company became more profitable on a per-share basis as it expanded.

Diving into Lennox’s quality of earnings can give us a better understanding of its performance. As we mentioned earlier, Lennox’s operating margin expanded by 4.7 percentage points over the last five years. On top of that, its share count shrank by 8.8%. These are positive signs for shareholders because improving profitability and share buybacks turbocharge EPS growth relative to revenue growth.

Like with revenue, we analyze EPS over a more recent period because it can provide insight into an emerging theme or development for the business.

For Lennox, its two-year annual EPS growth of 18.3% was lower than its five-year trend. We still think its growth was good and hope it can accelerate in the future.

In Q3, Lennox reported adjusted EPS of $6.98, up from $6.68 in the same quarter last year. This print beat analysts’ estimates by 2%. Over the next 12 months, Wall Street expects Lennox’s full-year EPS of $23.77 to grow 7.7%.

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

Lennox has shown impressive cash profitability, enabling it to ride out cyclical downturns more easily while maintaining its investments in new and existing offerings. The company’s free cash flow margin averaged 9.5% over the last five years, better than the broader industrials sector.

Taking a step back, we can see that Lennox’s margin dropped by 1.4 percentage points during that time. We’re willing to live with its performance for now but hope its cash conversion can rise soon. If its declines continue, it could signal increasing investment needs and capital intensity.

Lennox’s free cash flow clocked in at $265.1 million in Q3, equivalent to a 18.6% margin. The company’s cash profitability regressed as it was 8.8 percentage points lower than in the same quarter last year, but it’s still above its five-year average. We wouldn’t read too much into this quarter’s decline because investment needs can be seasonal, leading to short-term swings. Long-term trends trump temporary fluctuations.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Lennox’s five-year average ROIC was 52.1%, placing it among the best industrials companies. This illustrates its management team’s ability to invest in highly profitable ventures and produce tangible results for shareholders.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Lennox’s ROIC has unfortunately decreased significantly. Only time will tell if its new bets can bear fruit and potentially reverse the trend.

Lennox reported $52.9 million of cash and $1.37 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $1.17 billion of EBITDA over the last 12 months, we view Lennox’s 1.1× net-debt-to-EBITDA ratio as safe. We also see its $30.5 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

We struggled to find many positives in these results. Its revenue missed and its organic revenue fell short of Wall Street’s estimates. Overall, this was a softer quarter. The stock traded down 1.7% to $540 immediately after reporting.

Updated: December 4, 2025 at 10:16 PM EST

Before deciding whether to buy Lennox or pass, we urge investors to consider business quality, valuation, and the latest quarterly results.

There are some positives when it comes to Lennox’s fundamentals. To kick things off, its revenue growth was decent over the last five years. And while its diminishing returns show management's recent bets still have yet to bear fruit, its astounding EPS growth over the last five years shows its profits are trickling down to shareholders. On top of that, its stellar ROIC suggests it has been a well-run company historically.

Lennox’s P/E ratio based on the next 12 months is 20.8x. Looking at the industrials space right now, Lennox trades at a compelling valuation. If you trust the business and its direction, this is an ideal time to buy.

Wall Street analysts have a consensus one-year price target of $573.86 on the company (compared to the current share price of $504.68), implying they see 13.7% upside in buying Lennox in the short term.