Investment Thesis: Revenue growth, margin expansion, and strength in commercial HVAC (CHVAC) are driving Trane Technologies' (NYSE:) outperformance in the broader HVAC industry. The company has achieved two consecutive years of growing Americas CHVAC revenue by 50% or higher on 3-year stacks, achieved a 120% two-year stack on applied solutions bookings growth, and has an 8-10x service revenue tail coming its way for each applied solutions system it installs. The company posted strong results despite a challenging quarter while navigating an uncertain macroeconomic backdrop. Though buying opportunities may improve somewhat, the stock is fairly valued with upside, and the recent post-earnings pullback offers a good enough price to make small buys, with bigger purchases on pullbacks.\n\nEarnings Snapshot: Trane delivered strong Q2 operating results on the back of volume growth, productivity gains, and price realization. Net revenue growth of 8.3% YoY (7% organic) and mid-single digits equipment sales growth highlighted Trane’s strong underlying core operations during a challenging environment that saw some competitors see volume declines. Americas and Commercial (CHVAC) led the way, with applied solutions sales and bookings supporting future demand. Several years of high growth in Trane’s applied solutions have led to an acceleration in higher margin services revenue, which grew in the low teens during the quarter. That operating leverage showed in Q2. Author Generated from SEC Filings Data Companywide bookings grew 5% (4% organic), to $5.63 billion, led by mid-teens CHVAC growth, and its $7.1 billion, but is down both sequentially and YoY due to residential and transport weakness, and some run-off of the, as called out during Q2 2024. EMEA saw strong top-line growth, while margins were impacted by investments. APAC, particularly China, may be nearing a revenue trough, with long-term growth expected to return soon. Transport was very weak, but Trane is positioning itself to outperform once the cycle turns favorable. Residential sales were challenged by supply chain issues, excess channel inventory, potentially waning demand, and a transition to A2L refrigerants and tariffs, which are causing price increases just as consumer spending softens. Inventory rose 7.1%, to $2.3 billion, partially due to weak residential deliveries.\n\nLooking Ahead: Trane raised guidance for the full year, boosting its organic revenue outlook from a range of 7 - 8% to a more concrete 8%, while bumping its EPS target by $0.25 per share to $13.05 at the midpoint, which equates to YoY growth of 16.1%. Though TT expects adjusted OM to fall slightly in H2, YTD performance and momentum in CHVAC and the Americas, as well as normal seasonality, imply that the company can deliver at least mid-to-high 18% adjusted operating margin for FY2025 which would put adjusted operating income growth roughly in line with forecasted EPS growth and supports TT’s expectation to once again achieve a 100% FCF conversion rate. With guidance of $13.05 per share in adjusted EPS, and 225.1 million shares outstanding, that equates to at least $2.94 billion in free cash flow for the full year. The company continues to reduce its share count through repurchases and targets a return of 100% of excess cash to shareholders. Let’s dive deeper into the strongest and weakest parts of TT’s business, starting with the strong Americas and CHVAC segments. Due to overlap, segments and regions may be discussed in multiple sections.\n\nAmericas and CHVAC Driving The Business: The strongest and most impactful region continues to be in the Americas, as net revenue grew 9.4% YoY (9% organic revenue), segment adjusted EBITDA grew by 15.0%, and segment adjusted operating income by 16.5%. Bookings were up 7.6% to $4.5 billion, led by CHVAC bookings and strong applied solutions sales and bookings. Trane’s 9% organic Americas revenue growth signifies that its solutions are winning in the market. With this growth outpacing global HVAC market estimates and those of competitors, Trane is clearly taking market share. According to management, CHVAC Book-to-Bill exceeded 1.0 in all regions during Q2, while bookings grew over 20% to an all-time high, and applied solutions bookings grew over 60%. While data centers are a key driver of applied solutions growth, most of Trane’s 14 CHVAC verticals showed strength during the quarter. The company is highly diversified and not tied to a single trend, coupled with services revenue, which minimizes the risk of a boom-bust data center capex cycle.\n\nCommercial Was Strong And Should Remain That Way: TT raised its FY 2025 Commercial HVAC (CHVAC) outlook from high-single digits to low-double digits growth, led by over 60% growth in applied solutions bookings. Trane’s solutions-focused strategy has positioned it as a leader in designing, selling, and servicing highly complex, efficient, and connected applied commercial climate control systems. Trane’s two-year stack of over 120% applied solutions growth is the key ingredient of future returns. Applied equipment comes with a two-year lag before services revenue begins to kick in. With 90% of its $7.1 billion backlog in CHVAC, and much of that from applied solutions, this provides a rolling service revenue catalyst that is just now emerging. Management frequently states that every applied solution comes with the benefit of an 8-10x service multiplier over the life of the product, meaning that the installation of the system, while valuable today, pales in comparison to the long-term value of each contract. Services now make up a third of the company’s revenue, with this share only expected to increase, push margins higher, and lessen the cyclicality of the company’s sales. This area of the business holds incredible growth potential over the next few decades and positions the stock as a potential DCF breaker, one that can outgrow the terminal growth assumptions of most valuation practitioners.\n\nEMEA and Residential Were Weaker, But Highlight Relative Strength: Trane’s Residential sales fell mid-single-digits in Q2, with channel inventories outweighing demand, leading to fewer sales. A R-454B cylinder bottleneck contributed to the lack of supply for new A2L equipment, which impacted residential sales in Q2. The persistence of cylinder shortages is expected to impact residential revenue by $150 million in H2, but to abate by year’s end. Despite the Q2 residential slump, and that residential sales were still up 3% in H1, due to a strong Q1. The cylinder shortage issue was highlighted by competitors and partners such as Lennox (), Carrier Global (), Watsco (), and Hudson Technologies (). Despite the consistent message that interruptions factored into lower sales, most companies noted residential unit volume declines in Q2, which could still mean that demand is beginning to wane in the U.S. residential market., and WSO’s relative to Q2 2024. TT expects flat residential sales for the full year, which is a downward guidance revision from its prior expectations of mid-to-high single digits of sales growth. Residential appears to be heading towards a cyclical low, following the high-growth pandemic years, softening of consumer spending in 2025, tariffs, rising costs from the A2L transition, and low housing turnover, which limits new installs and upgrade cycle activity. Regnery maintained the expectations that Trane’s residential business is a long-term GDP-plus grower and guidance is stronger than most of its competitors, continuing a trend of outperformance and boding well for the eventual return to growth. Near-term weakness does not outweigh the long-term secular demand drivers of a growing global middle class, increasing average temperatures, increasing extreme weather events, and the push for efficiency. Once TT’s channel inventory and cylinder availability normalize, interest rates potentially fall, and the housing market, I expect that TT’s residential business will pick up again.\n\nEMEA: EMEA revenue grew at a healthy 9.7%, driven by.” Organic revenue only grew 3% in Q2. The build-out of a partner network for EMEA refrigerated transport and the acquisitions cut into margins, leading to minimal profit growth. Booking growth of 5.3% YoY, and the fact that Trane is positioning itself to grab expected future growth in EMEA transport at a time when large capital projects are being undertaken, appears extremely prudent. Whenever a high ROIC business makes strategic investments, while outperforming end markets through a downcycle, it looks like excellent capital allocation to me.\n\nTransport and APAC Are Struggling, But The Future Looks Alright: Trane’s smallest but most cyclical segment is its transport business, part of its Thermo King acquisition. An eight-quarter deep freight recession has not spared Trane. Transport revenues fell by low single digits for both the Americas and EMEA Transport segments. While underperforming expectations, these businesses continue to significantly outperform end markets, which were down 30% in the Americas and low single digits in EMEA. Signs of an early recovery might be seen in the Americas, where transport bookings grew in the low single digits YoY. However, in EMEA, transport bookings declined in the low single digits. Company-wide, TT’s transport book-to-bill ratio fell below 1.0, meaning Trane is not replenishing its backlog while it pulls from it for current sales. Trane told analysts that ACT still expects 20% refrigerated trailer market growth in 2026, though it admitted market estimates have not been reliable in recent years. Industry research still paints a constructive medium-term backdrop:, while. The mismatch in dollar-based growth and unit-based growth estimates is due to the tailwinds supporting Trane’s growth initiatives, higher ASPs from Electric TRUs, driven by the push to electrify and lower emissions, particularly in and in, and value-added services. Trane sells mission-critical chilled units, and its transport business can run counter-cyclically with the overall freight market, so general freight activity trends are not the most important factor.\n\nRegional Breakdown: APAC continues to suffer from weakness, with sales down 6.7% YoY, and deleveraging seen throughout the results. Bookings have declined 17% over Q2 2024, but the is the main culprit behind declines, leading to lower sales but likely protecting Trane from potential losses, given that most competitors followed suit with tightening their own standards as real estate and economic risk increased in China. Trane expects flat APAC revenue for the full year and a return to growth as it laps the decision to adjust its credit policy. Author Generated from SEC Filings Data Trane maintains that APAC is a strategic area of innovation and much like residential and transport, any return to growth from these smaller segments could add incremental sales and profits and act as a supporting catalyst for sentiment in the stock.\n\nValuation: Trane’s durable moat and positioning to benefit from several secular growth themes justify the premium valuation it carries. These trends include data center growth, modernization and efficiency improvements in HVAC equipment, as well as commercial and residential building electrification. Cold chain expansion and global transport refrigeration growth, as well as global infrastructure development to support both a growing population and expansion of the middle class, also contribute to TT’s CHVAC, transport, and international potential. Extreme weather and increasing demand on power supply systems make Trane’s custom applied solutions even more critical for its CHVAC customers. The current valuation is pricing in durable growth. TT has traded at a median P/FCF of 30.15x since the end of 2020, and currently trades at a TTM multiple of 34x FCF. Is this justified? Fiscal AI Companies like Trane require looking beyond multiples and DCFs. We can get bogged down in quantitative analysis for TT, and try to project cash flows, but the best solution to valuing a company like this is to lean into qualitative analysis and set expectations with quantitative measures. If we take 3 growth rate assumptions off of TT’s forecasted FY 2025 adjusted FCF base of $2.9 billion (~$13.04 per share), and assign three different 10-year growth rates and P/FCF multiples that might reflect the market’s sentiment granted at year ten, we can visualize what Trane needs to accomplish to be a worthy buy or a hold and watch stock. *Note: I am not forecasting free cash flow growth, merely examining the market’s expectations under different circumstances. Author's Expectations Model If either of the three scenarios were to play out, this is roughly what the annualized total returns would look like, assuming no share repurchases or dilution, and no increase to the current 0.9% yielding dividend per share. Implied Total Returns From Expectations Model Calculations for reference are below. Implied P/FCF Calculations Now that we have a visual on what might be required to justify an investment, we can determine our confidence in either of those scenarios playing out. I believe the moat and the expected growth and secular tailwinds justify the current valuation for Trane.\n\nThe Moat Is Strong, and Supports Valuation: Trane Technologies enjoys a wide, durable moat built on four reinforcing pillars: High switching costs & embedded solutions, scale and cost advantages, a data-driven virtuous cycle, and pricing power and intangible assets.\n\nHigh Switching Costs & Embedded Solutions: Trane’s mission-critical applied systems in data centers and large commercial facilities are custom-designed, integrated, and software-monitored. Replacing Trane would mean costly downtime, re-engineering, and risk to sensitive hardware. These solutions lock customers in for decades while driving high-margin services revenue.\n\nData-Driven Virtuous Cycle: Connected controls stream operating data back to Trane’s analytics platform. Each new installation improves the algorithms that optimize energy use across the entire fleet, raising performance for existing customers and strengthening Trane’s value proposition. When CFO’s are selecting a service provider, faster paybacks are one reason to select Trane, supporting its value proposition.\n\nScale & Cost Advantage: A global manufacturing footprint and a roughly 30% market share in the Americas region CHVAC give Trane superior purchasing power and R&D leverage. Scale keeps unit costs low and funds steady innovation, while rivals struggle to match Trane’s breadth or price without sacrificing margin.\n\nPricing Power & Intangible Assets: A premium brand, industry-leading design software, and a highly trained direct sales and service force support annual price increases without volume loss. These advantages translate into consistent share gains, rising margins, and low customer churn, providing clear evidence of a sustainable competitive edge. Gross margin has expanded from 30.5% in FY 2020 to 36.3% over the TTM period, while operating margin has expanded from 12.2% to 7.9% over the same timespan. Meanwhile, revenue has grown at a CAGR of 12.0% and operating cash flow at a CAGR of 19.8%.\n\nROIC, Secular Positioning, and Operating Leverage Profile Supports Valuation: Delivering 9% net and organic revenue growth while maintaining Capex levels around 2% of sales, and maintaining a 25% operating leverage algorithm, showcases both the capital-light nature of Trane’s business model, and the ability to drop incremental revenue straight down to free cash flow. With high-teens ROIC, secular tailwinds, and accretive acquisitions and partnerships coming into the fold, Trane is building a sustainable cash flow-generating machine. Since FY 2020, Trane has parlayed a 12.0% revenue CAGR into an 18.9% FCF CAGR, by expanding its operating margin by 570 bps and ROIC from 8.0% to 19.6%. Fiscal AI Trane’s $7.1 billion backlog and growing installed base of applied solutions systems present many years of recurring revenue ahead. As discussed, data center builds are expected to experience significant growth for several years.\n\nRisks: Residential demand could be threatened by a combination of tariff and A2L transition cost increases, as well as economic pressures on consumers. Consumer sentiment sits more than 7% lower than it was last year, but has improved in recent weeks. It is at the lower end of the trailing five-year range. Y-Charts Any crash in new builds of data centers would likely spark a sentiment shift and threaten Trane’s highest growing vertical in CHVAC. A recession would also impact investments at all levels of the economy, including residential, CHVAC, and transport.\n\nConclusion: I believe that there is enough evidence that Trane’s growing installed base in CHVAC and the coiling spring of its services business will provide it with durable growth. We appear to be in the early stages of an infrastructure investment cycle that should drive 10-20 years of high ROIC growth for Trane. Trane’s positioning to benefit from huge secular tailwinds, expanding ROIC, operating leverage, wide moat and strong backlog and service revenue tail, justifies a low-to-mid 30s P/FCF multiple, making it fairly valued and worthy of making small additions to my existing position, buying the dips, and making larger additions on bigger pullbacks. While I rate the stock a buy, it does not represent the table-levels of near-term conviction. I intend to make a small addition to my existing holding in TT, and to look for bigger drawdowns to make a larger purchase.

Trane Technologies Moat And Secular Trend Positioning Justify A High Multiple

Trane Technologies reported strong Q2 earnings driven by revenue growth, margin expansion, and strong performance in its commercial HVAC (CHVAC) segment. The company achieved double-digit organic revenue growth in the Americas and commercial segments, with applied solutions bookings growing over 60% and service revenue growing in the low teens. Trane raised its full-year guidance, projecting 8% organic revenue growth and an adjusted EPS of $13.05, supporting a forecast of $2.94 billion in free cash flow. The company's durable competitive moat, built on high switching costs, scale, pricing power, and a data-driven virtuous cycle, is positioned to benefit from secular trends such as data center growth, building electrification, and climate resilience. Despite weakness in residential and transport segments, Trane maintains a strong backlog of $7.1 billion in CHVAC, with an 8-10x service revenue tail per installed system. The stock trades at a 34x FCF multiple, which the author believes is justified by long-term growth potential and durable fundamentals, though it remains a buy with moderate near-term conviction.