Trane Technologies (TT) is a leading manufacturer and service provider in the Heating, Ventilation, and Air Conditioning (HVAC) market. The HVAC industry has benefited and will continue to benefit from several strong secular trends. It is a consolidated market, with only a few large companies competing. Among them, Trane consistently sets itself apart by outgrowing the market and generating higher returns on invested capital due to its unique position, strong culture, and disciplined operating model.Additionally, TT’s strong balance sheet and robust cash flow provide ample opportunities to enhance shareholder returns, whether through share repurchases or strategic tuck-in acquisitions that strengthen its competitive moat.
The HVAC industry stands out from many other industrial markets because a significant portion of its revenue comes from replacements and upgrades rather than new installations. This dynamic contributes to steady and reliable revenue growth.
TT’s business serves four distinct sub-categories in the broader HVAC space.
Applied Commercial HVAC: In the US Trane is the market leader in this space. This is the crown jewel of TT’s business. The applied space can be thought of as highly engineered, complex large projects and systems. Not only does Trane supply large cooling units, which can rival the complexity and size of a jet engine but provides engineering expertise to customers, auxiliary products such as sensors and controls and software solutions to manage and design these systems. The applied market generally kicks off large, highly profitable recurring services and aftermarket revenue streams once installed, which the company says is generally 8 to 10 times the upfront cost to the customer over the life of the system. Services revenue makes up approximately 50% of their commercial business.
Light Commercial: This category is relatively less complex than the applied space but still requires engineering expertise. Think of light commercial as the large units you might see on top of a smaller building such as a restaurant or shopping center.
US Residential: Trane is known to be the gold standard in US residential, where they can charge a premium due to the reliability, brand and ability to drive innovation that in-turn saves homeowners energy costs. Trane does not compete in the residential market outside of the US.
Transportation Refrigeration: TT provides temperature-controlled trailers. The market is very consolidated but can be subject to cyclicality in the trucking and freight space. Incremental margins are high in this business which is currently approaching a bottom.
Sustainability is prompting both consumer sand companies to reassess their HVAC systems. The key driver behind this shift isn’t just meeting ESG mandates but rather economic benefits. Advances in HVAC technology have made system upgrades or replacements a cost-effective decision, delivering significant savings to end users by substantially lowering energy bills. Payback periods are relatively short, as older systems can waste approximately 30% of energy consumption. These savings translate into real financial benefits for customers.
In recent years, the United States has seen significant investments in mega-projects—Trane Technologies’ core market. These projects have substantial heating and cooling demands, with equipment installation often trailing initial groundbreaking by several years.Similarly, in the post-pandemic era and under the new administration, re-shoring has become a priority for many businesses. Unlike its peers, Trane generates 75% of its revenue within the United States. Combined with its expertise in large, complex HVAC systems, this positions TT as a prime beneficiary of this trend.
The technology industry continues to invest heavily in data centers, particularly as large tech companies see businesses increasingly offloading their computing and storage needs to third-party cloud providers. Beyond the general cloud migration trend, artificial intelligence is emerging as a major catalyst. AI requires immense computing power and data center capacity, driving demand for advanced cooling solutions while prioritizing energy efficiency.
Finally, technological innovation in the HVAC industry has led to increased digital connectivity, enabling remote monitoring, control, and maintenance of systems. This not only generates strong auxiliary service revenue for Trane but also provides additional incentives for customers to upgrade their systems.
Trane differentiates itself from competitors through key aspects of its business model.
US Centric: A major factor is that 75% of TT’s sales come from the United States. The U.S. market differs significantly from international markets in terms of heating and cooling technologies and competitive dynamics. Unlike its peers, Trane has avoided chasing growth in emerging markets, instead keeping its business model relatively simple. This focus has allowed the company to concentrate on innovation and execution at what it does best.
Going Direct: Several years ago, management made the wise decision to control their distribution in the commercial market by acquiring their third-party dealers. This has allowed them to have a direct relationship with the customer, building architects and engineers. Furthermore, TT has invested heavily in engineering and sales talent, which coupled with direct relationships helps TT embed themselves with customers and associated parties, creating very sticky long-term relationships.
Solely HVAC Focused: Several of Trane’s larger peers have other business lines outside of HVAC. These businesses tend to be of lower quality and distract from their efforts in the HVAC space.
High Barriers to Entry: Entering the HVAC space on its own would be a gargantuan task for any company considering the capital, engineering and manufacturing capabilities needed. Even if that could be accomplished the industry has incredibly strong go-to-market channels that it would be nearly impossible to break into.
We have followed Trane and the HVAC space for several years, looking at various competitors and distributors in-depth. We initiated a 3.25% position after valuation came in to more attractive levels based on concerns surrounding tariffs, data-center investment and a more normalized residential market. For a business of this quality with growth from continued strong secular trends these concerns are overblown. We will look to add to the position as we further get to know the story and management team, as well as be on the lookout to take advantage of volatility in the market.
