Over the last six months, Lennox’s shares have sunk to $437.64, producing a disappointing 17.3% loss - a stark contrast to the S&P 500’s 10.9% gain. This might have investors contemplating their next move.
Following the pullback, is now a good time to buy LII? Find out in our full research report, it’s free.
Why Does Lennox Spark Debate?
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.
Two Positive Attributes:
1. Operating Margin Reveals a Well-Run Organization
Operating margin is a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.
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 17.7%. This result was particularly impressive because of its low gross margin, which is mostly a factor of what it sells and takes huge shifts to move meaningfully. Companies have more control over their operating margins, and it’s a show of well-managed operations if they’re high when gross margins are low.
2. Increasing Free Cash Flow Margin Juices Financials
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.
As you can see below, Lennox’s margin expanded by 8.6 percentage points over the last five years. This is encouraging, and we can see it became a less capital-intensive business because its free cash flow profitability rose more than its operating profitability. Lennox’s free cash flow margin for the trailing 12 months was 14.2%.
One Reason to Be Careful:
Slow Organic Growth Suggests Waning Demand In Core Business
We can better understand HVAC and Water Systems companies by analyzing their organic revenue. This metric gives visibility into Lennox’s core business because it excludes one-time events such as mergers, acquisitions, and divestitures along with foreign currency fluctuations - non-fundamental factors that can manipulate the income statement.
Over the last two years, Lennox’s organic revenue averaged 4.4% year-on-year growth. This performance was underwhelming and suggests it may need to improve its products, pricing, or go-to-market strategy, which can add an extra layer of complexity to its operations. 
Final Judgment
Lennox’s positive characteristics outweigh the negatives. With the recent decline, the stock trades at 17.9× forward P/E (or $437.64 per share). Is now the right time to buy? See for yourself in our comprehensive research report, it’s free.
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