Lennox International Inc. (LII), AAON, Inc. (AAON): Stocks for a Hot Summer Day

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The company’s average net income for the 2009-2011 period was $85.2 million. That represents a compounded annual growth rate of 4.9% from the three-year period a decade earlier (1999-2001.) The figure would be higher if I had not altered the numbers a bit. I added a $26.8 million restructuring charge back in to 2001 earnings, reducing what would’ve been a $42.4 million dollar loss. I didn’t want a massive loss to distort the growth figures.

Even if this company immediately doubled its net income I still would not want to buy it. Let’s say that Lennox International Inc. (NYSE:LII) started generating $200 million in annual net income, more than double the 2012 figure. Would you pay $3.5 billion dollars for a company that was only generating $200 million a year?

The best investment of the group, and that doesn’t say much

With a market cap of $941.9 million,

AAON, Inc. (NASDAQ:AAON)

is a small company when compared to Lennox International Inc. (NYSE:LII) and Ingersoll-Rand PLC (NYSE:IR). This company’s climate control solutions only serve commercial customers. It is possible that this focus was a factor in it having the highest net profit margins of the group.

Net income data on this company extends back to 1991. In those 22 years, the company has never had a net income figure that was negative in full-year results.

The company’s net income for 2012 was $27.45 million. The average figure for 2009-2011 was $21.2 million, which represents a 10-year compounded annual growth rate of 5.7%. Those figures are not good enough for me to justify paying $941.9 million.

AAON, Inc. (NASDAQ:AAON) has the lowest price-to-tangible-book ratio of the featured companies at 6.25. That is still a very high multiplier, however. The only companies that are worth paying 6.25 times tangible book for are either established concerns with serious intrinsic value, or high-growth companies. AAON, Inc. (NASDAQ:AAON) is neither.

The bottom line

Its been an incredibly hot summer. Many people (but sadly, not me) are fortunately able to beat the heat thanks to a high-quality air conditioning system. Air conditioning is an awesome innovation that society will continue using for many decades to come.

That being said, stocks in the climate control field, or at least the stock of these three companies, don’t look like great investment options right now. Ingersoll-Rand PLC (NYSE:IR) would have negative equity if it weren’t for a bunch of intangible assets on its balance sheet, and Lennox International Inc. (NYSE:LII) and AAON, Inc. (NASDAQ:AAON) are expensive relative to their respective net incomes. Unless these companies increase their profits by a massive and practically impossible amount, investing in them is not a good idea at this time.

Ryan Palmer has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Ryan is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

The article Stocks for a Hot Summer Day originally appeared on Fool.com is written by Ryan Palmer.

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