- Written by Sara Nunnally, Editor, Inside Investing Daily
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It is hot outside. It's great news for an industry eager to break out of the doldrums.
It's supposed to breach 100 degrees here just north of Milwaukee. For the folks down south or back east, that might not mean a lot, but for this region, it's significant.
In Chicago, the average number of days over 100 degrees is 17 a year. There have already been 21 days of 100 degrees or more, and it's only the first week in July.
My electricity bill was almost $200 last month, and our air conditioner has been running nonstop.
And if my wallet is suffering, big businesses are probably hurting even more. I'm embarrassed to admit this, but yesterday, I called up my local Wal-Mart to see if they were open just so I could get out of the house!
(They were, by the way.)
With this kind of heat wave across the country, I wanted to look at companies that provide power-efficiency solutions and air conditioning.
These companies haven't been doing too well up until now, but this heat wave might be good for something, and help turn them around.
Let's look at three: Lennox International (LII:NYSE), Johnson Controls Inc. (JCI:NYSE), and United Technologies Corp. (UTX:NYSE).
Lennox makes climate-control products for a number of different customers, from the guy who wants to buy a pellet stove (one of the best in the business) right on up to the mammoth roof-mounted air conditioning units on malls. This company's up about 10% in the past 52 weeks.
JCI is a company I've always been interested in, but it's the poorest performer of the three, down nearly 35% in the past year. But the company's building and power-efficiency solutions are going to be in high demand over the long term. Right now, this segment is lagging.
UTX is a conglomerate with some major brands you've probably heard of, such as Carrier, which offers air conditioning units among other products. But its other segments aren't anywhere close to the heating and cooling sector. Performance-wise, UTX is right in the middle of Lennox and JCI.
So how do you choose? Do you pick the one that's been performing well over the past year? Or do you pick the one that could be undervalued and oversold?
If you've been reading Inside Investing Daily for a while, you've know the categories I use to find value.
Here's how these three stack up against each other.
For value companies these five categories have the following criteria:
Price/Earnings: Lower than the industry average
Price/Book: Lower than 1.5
Debt/Equity: Less than 1
Free Cash Flow: Flexible -- Depends on the company's investments
PEG Ratio: Less than 1
Using these metrics, JCI clearly has the best value overall... But its share price performance leaves a lot to be desired, and the negative free cash flow means you'll need to look a little deeper.
For the company's most recent quarter (reported at the end of April), JCI increased its capital spending to $448 million, or $173 million higher than the previous quarter. This has a direct impact on free cash flow, as it accounts for how much money a company has left after any capital investments.
Investments for the quarter were $380 million... which could include costs from acquisitions, even those made in previous quarters.
That said, if the company were to get into some serious hot water from an unforeseen issue, not having free cash flow could influence how well JCI reacts.
JCI did have a $5.3 billion record backlog by the end of the quarter for commercial building efficiency solutions, which bodes well for the future, but there's no doubt that JCI's share price has been affected by capital investments and poor growth in a high-cost segment.
Check out JCI's chart compared with LII and UTX.
All three of these companies had a tough year between 2011 and 2012, and for all that LII has bounced back in the past 52 weeks, it had the most ground to make up.
So here's the last word... JCI has the most potential and value, but that might not start kicking in for another quarter. Over the long term, JCI would be my pick, but smart investors would wait a bit longer for a better price -- I'm not sure JCI has hit bottom yet.
In the meantime, Lennox does have a little higher to run. You might be able to grab a neat 10% over the next four to eight weeks.
P.S. When this "bomb" goes off, the stock market will buckle -- I'm talking about a potential 10% loss in a single day of trading.
To put that into perspective, a one-day loss of that size has happened only three other times in history... Let me explain what's about to happen.