This old technology getting some fresh attention is a trend investors may not want to miss: Heat pumps. The devices are seen as a critical tool to achieve global net-zero targets, particularly as temperatures continue to rise. Making the switch will also benefit consumers’ wallets and punch up the value of several energy-intensive areas in the market, ranging from real estate to industrials. While it hasn’t turned into a huge cash driver just yet, it’s heading in the right direction, analysts say. Heat pumps are continuing to gain market share within the broader heating, ventilation and air conditioning industry, according to UBS, outselling gas furnaces in the U.S. for the first time last year. “Recent trends, such as the push for the decarbonization and electrification of heat, economic factors, and government support through regulation and incentives mean that the market for industrial heat pumps is set to skyrocket, with expected growth of more than 15 percent per annum until 2030,” McKinsey analysts wrote in a recent report. “Early market entry is key for success in this race.” Heat pumps provide both air conditioning and heat — all in one device. They’re also three to five times more efficient than conventional heating systems. Using electricity, these devices transfer heat from lower-temperature space to a higher-temperature one, essentially absorbing “free” heat rather than generating heat, like Barclays analyst William Thompson said. When they’re powered by renewable energy sources, they decarbonize industrial heating, space and water, he added. Environmentally sustainable and energy efficient, heat pumps could optimize energy-intensive operations in areas like data centers. They also could lower costs for a majority of households and increase the value of the property where the units are installed. Increasing adoption of heat pump technology is being made by companies across several industries, including industrials, chemicals, real estate, paper and packaging and food and beverage. It’s a solution that is getting more attention in a rush to achieve climate goals. In order to keep global average surface warming at a level of no more than 1.5 degrees Celsius, as called for in the Paris Agreement , the United Nations has a target of reducing worldwide carbon emissions by 45% by 2030 and reaching net-zero by 2050. Progress isn’t moving as fast as it should be, however, the UN said. UBS strategist Amantia Muhedini estimates heat pumps could slash global CO2 emissions by at least 500 million tons through 2030, while the International Energy Agency predicts their use could trim global building space and water heating emissions by roughly 12% by 2030. “With almost half of global energy demand stemming from heating and cooling, more efficient HVAC solutions will be a crucial enabler of decarbonization. Heat pumps could play a viable role in this regard,” Muhedini said in a research note last week. Who stands to benefit? Industrial stocks — namely the major heat pump manufacturers — are perhaps the most salient investing opportunity. “HPs are disrupting the heating, ventilation, and air conditioning (HVAC) industry,” Barclays’ Thompson wrote in a recent note to clients. “In our view, HP manufacturers with established installer networks have a key competitive advantage since installers can face high switching costs when dealing with new suppliers, learning new HP systems, and facing reputation risk from poor HP installations.” Potential beneficiaries include heat pump makers Carrier , Trane , Johnson Controls and Lennox , according to Barclays. Carrier shares have jumped about 14.9% this year, but analysts think the stock could be slightly overvalued, expecting shares could decline about 0.7% per FactSet’s consensus estimates. The company earlier this year completed its acquisition of German heat pump company Viessmann Climate Solutions, a sign that the “somewhat fragmented HP industry seems to be in the early stages of consolidation,” Thompson said. It plans to divest even more of its non-HVAC businesses this year. Many analysts’ confidence in Carrier was boosted after its first-quarter beat earlier this month. Jefferies analyst Stephen Volkmann on May 5 lifted his price target on buy-rated Carrier by $7 to $74, implying 12.2% potential upside. He anticipates solid mid-to-single-digit growth for several years coupled with earnings growth ahead of its peers. Trane, another leading heat pump manufacturer, has seen its share price balloon by more than 36% this year. Analysts surveyed by FactSet have a consensus $333.20 price target on the stock, which implies just 0.7% potential upside. But like Carrier, Trane recently boasted solid first-quarter results, supporting analysts’ bullish sentiment on the stock. “Strong 1Q24 beat and raised ’24 guidance, we think indicate that TT continues to capitalize on relatively healthy end-market trends (particularly in [commercial HVAC]) and is delivering solid operational performance across margin and [free cash flow] generation, which, in our view, should support solid multi-year earnings growth and drive consistent shareholder value,” said Citi Research’s Andrew Kaplowitz. He kept his buy rating and increased his price target by $11 to $366, suggesting shares could gain 10.6% from the stock’s latest close. Trane on Wednesday announced its participation in the U.S. Department of Energy’s Commercial Building Heat Pump Technology Challenge , an initiative through which the company will develop new low-emissions heat pump rooftop units in an effort to help organizations meet their energy efficiency needs and decarbonization goals. According to the DOE, rooftop heat pumps can reduce greenhouse gas emissions and energy costs by as much as 50% compared with conventional rooftop units using natural gas heating. The DOE also runs a Residential Cold Climate Heat Pump Technology Challenge , which is partnered with Trane, Carrier, and Johnson Controls, among other leading heat pump makers. While Johnson Controls is another leading heat pump manufacturer, UBS downgraded the stock over what it sees as a lack of “positive catalysts ahead.” UBS expects the company will have difficulty hitting its 2024 forecast. Earlier this year, RBC Capital Markets analyst Deane Dray noted a decline in Johnson Controls’ HVAC shipments throughout 2023, driven by softness in residential markets amid higher mortgage rates and price inflation. Dray rates the stock underperform due to expected lukewarm earnings growth and margin risk. Dray prefers Carrier, which has a business that’s evenly split between residential and commercial markets. Johnson Controls has a high non-residential exposure of roughly 80%, while Trane is at 65% and Lennox at 20%, according to Dray. Beyond manufacturers Heat pump adoption also could create knock-on opportunites, according to Barclays. Companies like Rockwell Automation , an industrial automation technology provider, and manufacturing company Owens Corning could be beneficiaries of building upgrades — like the use of more energy efficient windows and insulation — that are needed to improve insulation and heating distribution to accommodate heat pumps. Owens posted a significant earnings and revenue beat in late April, leading UBS to hike its price target by $23 to $192, suggesting shares could climb more than 8.5% from Monday’s close. The stock has added nearly 18% this year. In the chemicals sector, companies that produce more eco-friendly refrigerants for heat pumps could one day reap the benefits of recent legislation in the U.S. that will ban next year the production of heat pumps that use refrigerants with high levels of global warming potential. Companies developing or creating alternatives include Honeywell International , Chemours and Arkema , Barclays said. Hurdles to adoption Several barriers for heat pump installation continue to plague its progress — such as a shortage of trained workers, high installation costs and supply constraints. It’s also important to note that while heat pumps can be much more efficient and cost-friendly than conventional heating, they generally don’t offer fuel savings relative to natural gas heating given the high ratio of gas-to-electricity prices in many countries, per Barclays. Major companies are setting an example by putting a spotlight on how they’ve been able to integrate heat pumps into their operations. According to the IEA, heat pumps could “prove suitable” to serve nearly 40% of industrial heating demand by 2030, mostly in the paper and packing, food and beverage, and chemical industries. For example, Unilever said in June 2023 that, “In our operations, thermal energy use accounts for most of our carbon footprint … to meet our target of achieving 100% renewable heat by 2030, we will be looking to significantly increase our use of heat pumps across our operations.” Nestle said a year ago that the company replaced the use of fossil fuels with industrial heat pumps in its plants in Spain and Switzerland, reducing tons of carbon dioxide emissions per year. UBS’ Muhedini recently wrote that “heat pump sales growth is looking optimistic” for this year. She said heat pump sales rose 11% in 2022, following more than 10% growth in 2021. “Although 2023 sales growth was negative, we conclude that this is due to the overall HVAC industry where gas furnaces had an even steeper decline,” she said, adding that governments around the world are incentivizing adoption through tax credits, rebates and grants.
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