Residential HVAC monthly trends remain strong but are peaking now, with a setup that is officially the exact opposite of where we stood at the bottom in ‘08/’09, a unique buying opportunity for the related stocks. Housing is strong, consumers are flush with cash and spending it on home improvements, the housing boom which stocked the replacement pool is at peak seasoning, for which replacement rate is now as high as the 2006 pre-buy and there is urgency from contractors to push replacements ahead of price, system cost increases and “while supplies last”.

Inventories are high, but juxtaposed with availability concerns, and there has been some contractor stocking as well. With the exception of new housing trends/fundamentals, we see all of these supports fading, and update our industry model with detailed half year forecasts through ‘24, showing a higher FY21 but larger declines to normal that is 20% below. Importantly, this is not a channel stocking issue, temporary, it looks to us like a replacement bubble, a more meaningful drag to not only those with independent distribution but those with a captive channel. As for other takeaways, pricing remains positive in the short term, consumers are pushing back on price increases at an accelerated rate indicating pricing power may be peaking. Lastly, commercial is expected to inflect in 2H21, up low-teens versus up LSD last year given strength in the economy and new construction. All in, residential upside this year but a steeper drop to normal, while commercial remains on track for recovery. Our preference remains OW rated JCI > N rated CARR > N rated TT > UW rated LII.

 2021 HVAC survey. We received responses from ~100 independent distributors from early July. For the eleventh consecutive year, J.P. Morgan partnered with HARDI, the association representing independent HVACR distribution in North America.

 Raising 2021 industry growth estimates, more of a drop to normal in ’24 that is 20% below with future growth a TBD. The survey suggests there is upside to this year but a normalization of increased replacement rates on return to work and material increases in equipment prices, perpetuated by the 15/16 year anniversary of peak unit sales (2005), suggests a material drop in the out years. We continue to believe “normal” volume here is ~8 mm units, which is ~20% below our new ’21 unit forecast of 10-10.5 mm units. The simple math as suggested by industry shipment trends from 15 years ago shows that we could go lower than this in the intermediate term.

 Residential better in June/2Q. It would appear as though 2Q is coming in at up ~30%+, with June potentially up ~15% despite a materially tougher comp. Weather is expected to contribute to sales growth this summer selling season, however, optimism on this front is lower than last year while the influence of housing, consumer confidence and the economy is at record levels as zero respondents cited concerns of it impacting end market demand, the first time in the survey’s history.