LENNOX INTERNATIONAL INC (LII): what the price requires

At today's price, LENNOX INTERNATIONAL INC (LII) is priced for +20.5% growth. boothcheck doesn't publish a fair value or a price target; it shows what the price assumes, so you can judge whether that bar is too high.

Generated: 2026-07-14 · Exported: 2026-07-16 · Source: https://boothcheck.com/report/LII

Headline

FieldValue
TickerLII
CompanyLENNOX INTERNATIONAL INC
Current price$549.84/sh
CompositionHome Comfort Solutions 64% / Building Climate Solutions 36%

What The Price Requires (Inversion)

The assumption today's price embeds, recovered by inverting the valuation.

FieldValue
Inversion basiswhole-company
Operating margin needed19.7%
Operating margin today19.7%
Margin expansion implied+0.0pp
Implied growth20.5%
Multiple paid21x operating income

The operating-margin requirement is derived from the framework's value band at year 12, a separately labeled basis from the headline growth/duration solve.

Solve inputs: computed at a 9.7% cost of capital with 4% terminal growth over a 5-year stage; each 1pp of cost of capital moves the implied operating-profit growth ~7.1pp.

How unusual the bet is: within-range

ReferenceValue
vs own history+0.44σ
cohort percentile (of 225 peers)45
sustained it ~5 years at this level37%
implied end-window share0%

Valuation X-Ray

Every valuation family lands below the price. The price therefore requires assumptions beyond what those standard frames encode.

How the valuation models price the stock relative to the market price. Price/FV above 1.0 means the market pays more than that lens defends (expensive); at or below 1.0 the lens can defend the price.

FamilyMedian price/FVModelsReads
Asset1.83x4expensive
Earnings3.01x5expensive
Relative1.46x3expensive
Growth1.65x3expensive

Families that call it expensive: Asset, Earnings, Growth

The models below discount at their own flat-beta convention rates (cost of equity 9.3%, WACC 8.9%); the inversion above states its own rate.

Per-Model Detail (n=15)

ModelFamilyFVPrice/FVApplicableMethodology
DCF Perpetual GrowthGrowth$187.102.94xyesFCF base $0.7B, growth -2% (input: historical growth), terminal g 0.5%, WACC 8.9%, 5yr projection
DCF Exit MultipleGrowth$455.861.21xyesExit EV/EBITDA: 15.5x / 17.5x / 19.5x (bear / base = today's held flat / bull), 5yr
Relative ValuationRelative$384.711.43xyesP/E 18x (static sector reference · 2026-04), scenarios: 15.2x / 18.0x / 20.8x (bear / base = reference held flat / bull), EV/EBITDA 12x
Simple DDMGrowth——no—
Two-Stage DDMGrowth——no—
Simple Excess ReturnAsset$241.882.27xyesBV/sh $34.68, ROE (TTM) 64.5%, ke 9.3%
Two-Stage Excess ReturnAsset$906.210.61xyes5yr excess ROE then converge to ke=9.3%
Discounted Future Market CapGrowth$332.251.65xyesRev $5.3B, growth -2% (input: historical growth; tapered), Terminal P/S: 3.1x / 3.7x / 4.2x (bear / base = today's held flat / bull, cap 8x)
Growth-Adjusted P/ERelative——no—
Margin TrajectoryGrowth——no—
Earnings Power ValueEarnings$190.222.89xyesNormalized EBIT (5y avg op income, one-time charges added back) $0.83B × (1−20%) / WACC 8.9% → EPV (no growth)
Residual IncomeAsset$399.101.38xyesBV $34.68 + 5yr PV of (ROE (TTM) 64.5% − Kₑ 9.3%) × BV; BV grows 8.8%/yr
Graham NumberAsset$131.684.18xyes√(22.5 × EPS $22.22 × BVPS $34.68) — Graham's conservative floor
EV/EBITDA RelativeRelative$369.451.49xyesEBITDA $1.14B × sector EV/EBITDA 12.0x
FCF YieldEarnings$182.813.01xyesFCF $660.7M / Kₑ 9.3% — zero-growth perpetuity
SBC-Adj FCF YieldEarnings$173.823.16xyesSBC-adj FCF $0.63B (FCF $0.66B − SBC $0.03B) capitalized at Kₑ
Ben Graham FormulaEarnings$78.756.98xyesEPS $22.22 × (8.5 + 2×-2.1%) × (4.4 / 5.3%)
ROIC-Justified P/BAsset$25.8321.29xyesBV $34.68 × (ROIC 6.7% / WACC 8.9%) (excluded from median)
P/Sales SectorRelative$375.561.46xyesRevenue $5.26B × sector P/S 2.5x
PEG Fair ValueRelative——no—
Earnings YieldEarnings$240.222.29xyesEPS $22.22 / required return 9.3% (Rf 4.3% + ERP 5.0%)
Funds From Operations MultipleRelative——no—
Clinical Phase NPVGrowth——no—
MertonAsset——no—
V5 Mechanical———no—

Solvency

FieldValue
Net debt$1.9b
Net debt / NOPAT (after-tax)2.30x
Net debt / operating income (pre-tax)1.83x
Interest coverage25.8x
Share count CAGR (buyback)-1.0%
Burning cashno

Bullet Takeaways

Bull Case

Begin with what the market is paying for, because the gap between that and the reported numbers is the whole debate. At roughly 18 times trailing operating income, the price embeds an assumption that Lennox grows operating income at about 12% a year and holds a mid-teens operating margin for years, against a company that earns a roughly 20% operating margin today and just printed a quarter where operating income actually fell. That is a demanding bet on a cyclical maker of furnaces and air conditioners. The bull case is that Lennox is not a typical cyclical, and the recent results contain the evidence for why.

The reason is the commercial business. Building Climate Solutions grew revenue 38% to $485 million in Q1 2026 and expanded its segment margin by 300 basis points to 19.7%, the kind of growth-with-margin-expansion that is rare in industrial machinery and that the market rewards with a higher multiple. Commercial HVAC is a stickier, replacement-and-retrofit-driven business than residential new construction; it rides building stock and regulation rather than housing starts. As the commercial mix grows, the blended margin and the durability of the franchise both improve, which is precisely the transition a premium multiple pays for. The residential weakness, by contrast, is cyclical and tied to a depressed new-home market that will eventually turn; the replacement cycle in the existing installed base is the floor under that segment.

The balance sheet and the cash generation back the bet. Interest coverage runs above 20 times operating income, net debt is modest at roughly a third of one year's operating income, and the company guides to $750 million to $850 million of free cash flow for the year. Management is returning that cash steadily: it raised the quarterly dividend to $1.36 per share and bought back $482 million of stock in 2025 with about $1 billion still authorized. A company with this coverage and this cash conversion can fund growth, acquire bolt-ons, and shrink its share count at the same time, and it has retired more than 16 million shares since launching its repurchase program in 2014. The bull case is that the quality and the cash flow justify the premium the market is paying.

Bear Case

Look first at how Lennox is buying its growth, because the capital-allocation picture in the data complicates the quality story. Management guides to about 8% revenue growth for 2026, but roughly half of that, about 4 points, comes from completed acquisitions rather than from the existing business. Acquisition-led growth is not free: it consumes cash, it adds integration risk, and it can flatter a top line that is soft underneath. At the same time the company is buying back stock aggressively, $482 million in 2025 with about $1 billion still authorized, at a price where no standard valuation method reaches the quote. Repurchasing shares at a rich multiple transfers less value per dollar than the same buyback would at a cheaper price; the company is returning cash, but it is doing so at the top of its own valuation, which is a capital-allocation choice worth scrutinizing rather than applauding.

The deeper issue is that the price requires a level of through-cycle performance the recent quarter undercut. Today's price assumes Lennox compounds operating income at roughly 12% a year and sustains a mid-teens operating margin, while no family of valuation method, asset value, earnings power, peer multiples, or forward growth, actually reaches the price on the trailing numbers. The price is a bet beyond what the standard frames support. Then the quarter arrived: operating income fell 3%, GAAP EPS fell 8%, and total segment margin dropped 130 basis points to 14.4%, driven by $50 million of factory under-absorption as the company cut production about 30% sequentially. That is the cyclical mechanism the premium ignores: when volumes fall, fixed factory costs spread over fewer units and margins compress fast. A maker of furnaces and air conditioners cannot grow operating income at 12% a year through a housing downturn, and the residential segment, down 12% organically, is in one now.

The input-cost picture compounds the margin risk. Aluminum is up about 25%, steel up 20% to 25%, copper up 10% to 15%, and diesel up about 50%; these are the raw materials and the freight in every unit Lennox ships. Passing those costs through depends on pricing power that softens when residential demand is weak, so the company is squeezed between rising inputs and a price-sensitive new-construction customer. None of this threatens solvency, the balance sheet is sound and coverage is strong, but the bear case does not need a solvency scare. It needs only the observation that a cyclical priced for secular compounding has just shown the cycle reasserting itself in the residential half of the business.

Valuation

The honest starting point for Lennox is that the price sits above every standard method. At roughly 18 times trailing operating income, the asset-value lens, the earnings-power lens, the peer-multiple lens, and even the forward-growth lens all land below the quote; no family reaches it. Translated into a bet, the price requires Lennox to grow operating income at about 12% a year and to hold an operating margin in the mid-teens, against a company that earns roughly a 20% operating margin today but just saw operating income decline. That is the central tension: the price pays for secular compounding, and the most recent quarter showed cyclical compression.

The two segments explain why a single whole-company read is uncomfortable. The commercial business, Building Climate Solutions, grew 38% with margin expanding to 19.7%, the profile that earns a premium multiple. The residential business, Home Comfort Solutions, fell 10% with organic revenue down 12% and segment profit down 30%, the profile of a housing-cycle cyclical. The blended multiple the market pays sits closer to what the commercial business deserves than the residential one, which is the implicit bet: that the commercial mix keeps growing and the residential trough is temporary. Among the methods, the peer-multiple lens is the least stretched, which fits a quality industrial trading rich but not absurdly so relative to its machinery cohort; the earnings-power lens is the most stretched, because trailing earnings just fell while the price assumes they compound.

Solvency is the part of the picture that asks the fewest questions. Net debt is modest, interest coverage runs above 20 times, and free cash flow guidance of $750 million to $850 million for the year comfortably funds the dividend, the buyback, and bolt-on acquisitions. The capital-return program is real, the dividend was raised to $1.36 per share, and the share count is shrinking. The question the valuation leaves is not whether Lennox can pay its bills. It is whether a price that no standard method reaches can be justified by a commercial-mix shift and a housing recovery that have to arrive on schedule for the premium to hold.

Catalysts

The near-term catalysts for Lennox cluster around the divergence between its two segments and the cost environment squeezing both. In Q1 2026 the commercial Building Climate Solutions segment grew 38% and expanded margin to 19.7%, while the residential Home Comfort Solutions segment fell 10% with organic revenue down 12% on weak new-home construction. The next several prints will show whether the commercial momentum holds and whether residential has found a bottom; management maintained full-year EPS guidance of $23.50 to $25.00 and free cash flow of $750 million to $850 million, and now targets about 8% revenue growth, of which roughly 4 points come from acquisitions.

The cost side is the offsetting catalyst. Material inflation accelerated, with aluminum up about 25%, steel up 20% to 25%, copper up 10% to 15%, and diesel up about 50%, and the Q1 margin took a 130-basis-point hit partly from $50 million of factory under-absorption as production was cut roughly 30% sequentially. Whether Lennox can recover that margin depends on pricing actions and on volume normalizing, both of which the next two quarters will test.

On capital allocation, the board raised the quarterly dividend to $1.36 per share and the company carries about $1 billion of remaining buyback authorization after repurchasing $482 million of stock in 2025. The pace of those repurchases, and whether they continue at today's premium multiple, is a standing signal of how management reads its own valuation.

Peer Cohorts (Per Segment, With Filing Citations)

Home Comfort Solutions (reported)

Building Climate Solutions (reported)

Methodology Note

Fundamentals sourced from SEC EDGAR filings. Current price from Databento. The priced-in inversion and valuation x-ray are computed by the boothcheck engine; narrative composed by AI from the structured data.

Sources

Q1 2026 earnings release · company dividend and buyback disclosures, 2025-2026 · company buyback disclosures, 2025 · company dividend disclosure, 2026

View the full interactive LII report on boothcheck