Sector financial performance:

This company, which is primarily a distributor of HAVC products, has been grouped into household appliance sector in household equipment industry.

It seems that the growth in demand from US market for residential and commercial HAVC products has been strong in the past several years. This has been reflected by increase in the same store sale of a typical distributor in this sector, which presents an average of 3-5% annual growth during the same period and growth seems to be accelerating after entering 2018 driven by product mix’s shifting to higher price equipment and stronger commercial demand.

The typical companies’ gross margin in this sector is about 24% under the pressure of raising steel price and the typical operating margin is about 8% with a SG&A as percentage of sales of about 16% in 2018.

The typical average enterprise price/EBI(a) ratio is: 28(interest/EBI ratio of 2%) and stock price/sales ratio is about 1.5.

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Company performance:

It seems that the demand for products of this company in the past several years has been strong and growing driven by increasing demand primarily for residential HAVC products (3%-4% growth in same store sales). And it seems that demand from commercial equipment has caught up in 2018, together with product mix’s shifting to higher price (more efficient products), pushes sales to grow faster in 2018.

The first six months of 2018 compared with 2017

Sales increased 5% primarily due to increase of 5% (4% for 2Q) from same store sales in demand for replacement of residential and commercial HVAC equipment and product mix.

The 2017 compared with 2016

Sales increased 3% primarily due to increase from same store sales in demand for replacement of residential HVAC equipment.

2016 compared with 2015

Sales increased 3% primarily due to increase from same store sales in demand for replacement of residential HVAC equipment.

Fiscal 2015 compared with 2014

Sales increased 4% primarily due to increase from same store sales in demand for replacement of residential and commercial HVAC equipment.

Its gross margin has been flat at around 24% in 2018. With the flat SG&A as percentage of sales (around 16%), its operating margin has thus still been at about 8% in 2018.

Stock price

This stock currently has an enterprise price/EBI(a) ratio of 28 ($175). We think that its stock is being relatively fairly valued compared it peers.