We think you should keep an eye on three companies:

1. Carrier Global (CARR)
2. Johnson Controls (JCI)
3. Honeywell (HON)

These companies play a pivotal role in making buildings more energy-efficient, and are set to thrive in a warming world. By capitalizing on HVAC-related market opportunities and addressing the pressing need for climate technologies, these stocks offer not only the potential for juicy financial gains but also the chance to contribute to a sustainable and greener planet.

Carrier Global Corp Ordinary Shares 

• Industry: Building Products & Equipment
• Fair Value Estimate: US$ 47
• Economic Moat: Narrow

Leading global HVAC company, Carrier Global (CARR) makes heating, ventilation, and air conditioning, refrigeration, and fire and security products. The firm generates 60% sales from commercial markets while residential accounts for the rest.

A leading supplier of climate control and fire and security solutions, Carrier is a high-quality franchise with leading brands across most of its product portfolio. “Carrier's HVAC segment (60% of sales) has the strongest long-term growth potential due to its commercial HVAC market exposure,” says a Morningstar equity report, and forecasts the commercial HVAC market will continue to outpace GDP “due to increased demand for energy-efficient and indoor air quality solutions.”

On the residential HVAC side, the report conveys a cautious near-term outlook even though demand has remained strong in recent years. While a rebounding housing market (beginning next year) and regulation changes (around improved energy efficiency) should be supportive of growth, the replacement cycle may be slowing down, the report adds.

On the operational front, Carrier is pushing to cut operating costs by 2%-3% annually, which could help expand its aftermarket mix and improve profit margins, “assuming healthy end-market demand and supply chains,” says Morningstar sector director Brian Bernard, who pegs the stock’s fair value at US$47.

Johnson Controls International PLC

• Industry: Building Products & Equipment
• Fair Value Estimate: US$ 72
• Economic Moat: Narrow

Ireland-based Johnson Controls (JCI) manufactures, installs, and services HVAC systems, building management systems and controls, industrial refrigeration systems, and fire and security solutions.

The firm’s revenue is split evenly between commercial HVAC (40% of sales) and fire and security (also 40% of sales), while residential HVAC, industrial refrigeration, and other solutions account for the rest. The company racked up more than US$25 billion in 2022 revenue.

Johnson Controls is a profitable and pure-play building technology and solutions business that “stands to benefit from secular trends in global urbanization and increased demand for energy-efficient and smart building products and solutions,” says a Morningstar equity report.

The COVID-19 pandemic provided a significant boost for the firm’s healthy building solutions, such as air filtration and touchless access controls. “These secular tailwinds should allow Johnson Controls to grow faster than the economies it serves,” says Bernard, who pegs the stock’s fair value at US$72.

Over the next couple of years, the firm is targeting a 6%-7% compound annual revenue growth, compared with expectations of 4%-5% market growth. Bernard identifies continued product innovation, increased service penetration, and the firm's participation in meaningful growth themes such as energy efficiency, smart buildings, and indoor air quality solutions as the key drivers of this outperformance. Johnson Controls can maintain its competitive advantages, which could support economic profits for at least the next 10 years, he adds.

Honeywell International

• Industry: Conglomerates
• Fair Value Estimate: US$ 225
• Economic Moat: Wide

Honeywell (HON) is a global multi-industry behemoth with one of the largest installed bases of equipment. It operates four business segments: aerospace, building technologies, performance materials and technologies, and safety and productivity solutions.

“The firm has successfully pivoted to capture multiple ESG trends, including the need to drive energy efficiency, reduce emissions, and e-commerce, among others,” says a Morningstar equity report.

The company has benefitted significantly from the pandemic-driven need for automation, particularly in warehousing given the strong secular trend toward e-commerce. “Many of Honeywell's automation solutions offer customers meaningful return on investment from greater productivity,” asserts Morningstar equity analyst Joshua Aguilar, stressing that “Honeywell is [also] strongly positioned to lead in carbon capture, given its large installed base and investments in solvents.”

Honeywell is poised to benefit from the increased demand for warehouse automation solutions. Other key growth drivers include new digital offerings that promote data analytics in powerplants, as well as remote security management, and energy savings in building solutions, and the broader commercial aerospace recovery.

“Over the next five years, Honeywell is capable of mid-single-digit top-line growth, incremental operating margins in the low-30s, between 9% and 10% adjusted EPS growth, and free cash flow margins in the mid-teens,” forecasts Aguilar who recently bumped up the stock’s fair value to US$225 from US$222, prompted by improved outlook for 2023.