Machinery Stocks

Lennox International Inc Valuation – Initial Coverage $LII

Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 10 Stocks for Using A Benjamin Graham Value Investing Strategy – March 2017.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a stock analysis showing a specific look at how Lennox International Inc (LII) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Lennox International Inc. is a provider of climate control solutions. The Company designs, manufactures and markets a range of products for the heating, ventilation, air conditioning and refrigeration (HVACR) markets. It operates through three segments: Residential Heating & Cooling; Commercial Heating & Cooling, and Refrigeration. It manufactures and markets a range of furnaces, air conditioners, heat pumps, packaged heating and cooling systems, equipment and accessories to manage indoor air quality, comfort control products, replacement parts and supplies and related products for both the residential replacement and new construction markets in North America. It manufactures and sells unitary heating and cooling equipment used in light commercial applications, such as low-rise office buildings, restaurants, retail centers, churches and schools. It manufactures and markets equipment for the global commercial refrigeration markets under the Heatcraft Worldwide Refrigeration name.

LII Chart

LII data by YCharts

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Downloadable PDF version of this valuation:

ModernGraham Valuation of LII – March 2017

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $7,410,194,778 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 1.13 Fail
3. Earnings Stability Positive EPS for 10 years prior Pass
4. Dividend Record Dividend Payments for 10 years prior Pass
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 256.78% Pass
6. Moderate PEmg Ratio PEmg < 20 29.27 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 201.31 Fail
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 1.13 Fail
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 5.25 Fail
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Pass
5. Earnings Growth EPSmg greater than 5 years ago Pass

Stage 2: Determination of Intrinsic Value

EPSmg $5.88
MG Growth Estimate 15.00%
MG Value $226.25
Opinion Fairly Valued
MG Grade D
MG Value based on 3% Growth $85.21
MG Value based on 0% Growth $49.95
Market Implied Growth Rate 10.39%
Current Price $172.03
% of Intrinsic Value 76.03%

Lennox International Inc. does not satisfy the requirements of either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio, high PEmg and PB ratios. The Enterprising Investor has concerns regarding the level of debt relative to the current assets. As a result, all value investors following the ModernGraham approach should explore other opportunities at this time or proceed cautiously with a speculative attitude.

As for a valuation, the company appears to be Fairly Valued after growing its EPSmg (normalized earnings) from $2.26 in 2013 to an estimated $5.88 for 2017. This level of demonstrated earnings growth supports the market’s implied estimate of 10.39% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value within a margin of safety relative to the price.

At the time of valuation, further research into Lennox International Inc. revealed the company was trading above its Graham Number of $12.35. The company pays a dividend of $1.65 per share, for a yield of 1% Its PEmg (price over earnings per share – ModernGraham) was 29.27, which was above the industry average of 22.25. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-16.29.

Lennox International Inc. scores quite poorly in the ModernGraham grading system, with an overall grade of D.

Stage 3: Information for Further Research

Net Current Asset Value (NCAV) -$16.29
Graham Number $12.35
PEmg 29.27
Current Ratio 1.13
PB Ratio 201.31
Current Dividend $1.65
Dividend Yield 0.96%
Number of Consecutive Years of Dividend Growth 8

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Most Recent Balance Sheet Figures

Balance Sheet Information 12/1/2016
Total Current Assets $1,005,900,000
Total Current Liabilities $888,600,000
Long-Term Debt $615,700,000
Total Assets $1,760,300,000
Intangible Assets $202,400,000
Total Liabilities $1,722,700,000
Shares Outstanding (Diluted Average) 44,000,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $7.75
Dec2016 $6.32
Dec2015 $4.09
Dec2014 $4.23
Dec2013 $3.39
Dec2012 $1.75
Dec2011 $1.65
Dec2010 $2.08
Dec2009 $0.90
Dec2008 $2.11
Dec2007 $2.43
Dec2006 $2.26
Dec2005 $2.11
Dec2004 -$2.24
Dec2003 $1.36
Dec2002 $0.66
Dec2001 -$0.83
Dec2000 $0.79
Dec1999 $1.81
Dec1998 $1.47

Earnings Per Share – ModernGraham History

EPSmg History
Next Fiscal Year Estimate $5.88
Dec2016 $4.61
Dec2015 $3.51
Dec2014 $3.02
Dec2013 $2.26
Dec2012 $1.70
Dec2011 $1.73
Dec2010 $1.83
Dec2009 $1.79
Dec2008 $1.94
Dec2007 $1.63
Dec2006 $1.09
Dec2005 $0.41
Dec2004 -$0.31
Dec2003 $0.69
Dec2002 $0.50
Dec2001 $0.49

Recommended Reading:

Other ModernGraham posts about the company

None. This is the first time ModernGraham has covered the company.

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Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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