Trane Technologies (TT)

HVAC company Trane (NYSE:TT) reported Q1 CY2025 results beating Wall Street’s revenue expectations, with sales up 11.2% year on year to $4.69 billion. Its non-GAAP profit of $2.45 per share was 11.3% above analysts’ consensus estimates.

Company Overview

With low-pressure heating systems as the first product, Trane (NYSE:TT) designs, manufactures, and sells HVAC and refrigeration systems, the former to commercial and residential building customers and the latter to commercial truck manufacturers.

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.

Competitors in the commercial HVAC space include Carrier Global (NYSE:CARR), Lennox International (NYSE:LII), and Japanese company Daikin (TSE:6367), which also owns the Goodman brand.

Examining a company’s long-term performance can provide clues about its quality. Any business can have short-term success, but a top-tier one grows for years. Luckily, Trane Technologies’s sales grew at a solid 9.5% compounded annual growth rate over the last five years. Its growth surpassed the average industrials company and shows its offerings resonate with customers, a great starting point for our analysis.

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. Trane Technologies’s annualized revenue growth of 11.6% over the last two years is above its five-year trend, suggesting its demand was strong and recently accelerated.

This quarter, Trane Technologies reported year-on-year revenue growth of 11.2%, and its $4.69 billion of revenue exceeded Wall Street’s estimates by 5%.

Looking ahead, sell-side analysts expect revenue to grow 6.4% over the next 12 months, a deceleration versus the last two years. This projection doesn't excite us and suggests its products and services will see some demand headwinds. At least the company is tracking well in other measures of financial health.

Cost of sales for an industrials business is usually comprised of the direct labor, raw materials, and supplies needed to offer a product or service. These costs can be impacted by inflation and supply chain dynamics.

Trane Technologies’s gross margin is good compared to other industrials businesses and signals it sells differentiated products, not commodities. As you can see below, it averaged an impressive 33% gross margin over the last five years. Said differently, Trane Technologies paid its suppliers $66.98 for every $100 in revenue.

This quarter, Trane Technologies’s gross profit margin was 35.8%, marking a 1.1 percentage point increase from 34.6% in the same quarter last year. Trane Technologies’s full-year margin has also been trending up over the past 12 months, increasing by 2.1 percentage points. If this move continues, it could suggest better unit economics due to more leverage from its growing sales on the fixed portion of its cost of goods sold (such as manufacturing expenses).

Trane Technologies 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 15.9%. This result isn’t too surprising as its gross margin gives it a favorable starting point.

Analyzing the trend in its profitability, Trane Technologies’s operating margin rose by 4.6 percentage points over the last five years, as its sales growth gave it operating leverage.

In Q1, Trane Technologies generated an operating profit margin of 17.5%, up 2.4 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.

Trane Technologies’s EPS grew at a spectacular 17.4% compounded annual growth rate over the last five years, higher than its 9.5% annualized revenue growth. This tells us the company became more profitable on a per-share basis as it expanded.

We can take a deeper look into Trane Technologies’s earnings quality to better understand the drivers of its performance. As we mentioned earlier, Trane Technologies’s operating margin expanded by 4.6 percentage points over the last five years. On top of that, its share count shrank by 6.6%. 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 shorter period to see if we are missing a change in the business.

For Trane Technologies, its two-year annual EPS growth of 24% was higher than its five-year trend. We love it when earnings growth accelerates, especially when it accelerates off an already high base.

In Q1, Trane Technologies reported EPS at $2.45, up from $1.92 in the same quarter last year. This print easily cleared analysts’ estimates, and shareholders should be content with the results. Over the next 12 months, Wall Street expects Trane Technologies’s full-year EPS of $11.65 to grow 12.3%.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

Trane Technologies has shown robust cash profitability, enabling it to comfortably ride out cyclical downturns while investing in plenty of new offerings and returning capital to investors. The company’s free cash flow margin averaged 11.3% over the last five years, quite impressive for an industrials business.

Taking a step back, we can see that Trane Technologies’s margin was unchanged during that time, showing its long-term free cash flow profile is stable.

Trane Technologies’s free cash flow clocked in at $220.6 million in Q1, equivalent to a 4.7% margin. This cash profitability was in line with the comparable period last year but below its five-year average. We wouldn’t read too much into it because investment needs can be seasonal, causing short-term swings. Long-term trends carry greater meaning.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Trane Technologies’s five-year average ROIC was 23.4%, 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. Fortunately, Trane Technologies’s has increased over the last few years. This is a great sign when paired with its already strong returns. It could suggest its competitive advantage or profitable growth opportunities are expanding.

Trane Technologies reported $860.5 million of cash and $4.77 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 $3.99 billion of EBITDA over the last 12 months, we view Trane Technologies’s 1.0× net-debt-to-EBITDA ratio as safe. We also see its $206.3 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 liked that Trane Technologies beat analysts’ revenue, EBITDA, and EPS expectations this quarter. Due to the "dynamic macro environment", the company is maintaining its full-year EPS guide rather than raising to reflect the beat. Zooming out, we think this was a solid quarter. The stock remained flat at $353 immediately following the results.

Updated: May 22, 2025 at 11:46 PM EDT

When considering an investment in Trane Technologies, investors should account for its valuation and business qualities as well as what’s happened in the latest quarter.

Trane Technologies is an amazing business ranking highly on our list. For starters, its revenue growth was solid over the last five years. On top of that, its stellar ROIC suggests it has been a well-run company historically, and its expanding operating margin shows the business has become more efficient.

Trane Technologies’s P/E ratio based on the next 12 months is 32.4x. There’s some optimism reflected in this multiple, but we don’t mind owning a high-quality business, even if it’s slightly expensive. Investments like this should be held patiently for at least three to five years as they benefit from the power of long-term compounding, which more than makes up for any short-term price volatility that comes with relatively high valuations.

Wall Street analysts have a consensus one-year price target of $412.18 on the company (compared to the current share price of $424.25).

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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