We Don’t See Outsize Tariff Risk for US HVAC Manufacturers with USMCA Exemptions

On April 2, President Trump announced sweeping tariffs, featuring a minimum 10% tariff on all US imports and higher tariff rates for select countries. Goods imported from Canada and Mexico that comply with the United States-Mexico-Canada Agreement remain exempt from tariffs.

Why it matters: US heating, ventilation, and air-conditioning manufacturers have meaningful production capacity in Mexico. In fact, Lennox CEO Alok Maskara pegged this number at 40% for the industry.

• However, we believe that most Mexican-manufactured HVAC equipment is USMC-compliant, meaning that tariffs on Mexico imports are currently a nonfactor for the industry.
• Conversely, the industry is exposed to tariffs on imported steel and aluminum, as well as goods from China and other Asian countries, such as ductless products. But these tariffs are manageable, in our view. Indeed, the effect of metal tariffs was negligible during the first Trump administration.

The bottom line: We’ve maintained our fair value estimates for narrow-moat-rated Carrier CARR ($53), Johnson Controls JCI ($88), Lennox LII ($430), and Trane Technologies TT ($244).

• While shares of all four companies have traded lower since April 2, we still think Carrier, Lennox, and Trane are overvalued. We still see significant downside risk for these stocks when revenue growth slows and/or margin expansion stagnates.
• We think Johnson Controls is fairly valued. We believe investors have been frustrated with the firm’s inconsistent organic growth track record, but we see a path ahead for steady mid-single-digit percentage organic growth, especially as the firm’s service strategy continues to gain traction.