Meet the Construction Stock That's Quietly Crushing the Market (And Sees More Growth Ahead in 2025)

Trane Technologies (NYSE: TT) is quietly having a fantastic year. Shares of the heating and cooling solutions company have gained 55% this year at recent prices, crushing the S&P 500's 23% rally. It has benefited from strong demand for its climate solutions products, especially in the commercial construction market.

The company is well-positioned for another strong year in 2025. Here's a closer look at what's powering its returns and its optimistic outlook for the coming year.

Start Your Mornings Smarter! Wake up with Breakfast news in your inbox every market day. Sign Up For Free »

Heating up in 2024

Trane's rise has been powered by strong demand for its namesake commercial and residential HVAC systems and its Thermo King transportation refrigeration units. Net revenue rose 11% in the third quarter to $5.4 billion, while adjusted earnings per share soared 21%. That continued the company's track record of delivering leading revenue and earnings growth. Its North American market was particularly strong, as net revenue jumped 15% to nearly $4.5 billion. It benefited from strong volume growth, positive pricing, and productivity gains, especially for commercial HVAC systems.

The company is also generating strong cash flow. Cash from operations over the first three quarters of the year increased by 53% to nearly $2.3 billion. Meanwhile, free cash flow -- cash from operations minus capital expenditures -- rose by 58% to more than $2 billion. The company used that cash to strengthen its balance sheet (a more than $500 million reduction in net debt) and make some strategic acquisitions. It also returns meaningful cash to shareholders ($800 million in dividends and $1 billion in share repurchases paid or committed to for the year).

That strong showing enabled the company to raise its guidance for the full year. It expects revenue to grow 11% while earnings per share should rise by 23%. That's an increase from its prior guidance of 10% revenue growth and 20% earnings growth.

Strong momentum heading into 2025

Trane Technologies has a lot of momentum these days. CEO Dave Regnery noted in the third-quarter earnings release that "customers continue to choose our sustainable solutions." It had the second-highest bookings in its history during the third quarter at $5.2 billion, a 5% year-over-year increase. Its backlog is at $7.2 billion, 90% of which is in commercial HVAC projects, and it has a strong growth pipeline. Those factors help drive its expectation for "2025 to be another strong year," Regnery said.

While the commercial HVAC market is the driving force, the company sees some positives ahead in its residential and North American transport markets. It expects its residential heating and air products to benefit from a growing economy next year. Meanwhile, it anticipates the transportation sector's current headwinds will shift into a growth tailwind next year.

Trane also continues to invest in innovation to drive future growth. For example, the company recently acquired BrainBox AI, a pioneer in autonomous HVAC controls and generative AI building technology. The company plans to combine BrainBox AI's technology with its advanced building management and digital capabilities to help reduce emissions in buildings.

The company also expects to continue generating lots of cash. It plans to use that money to continue investing in its business (organically and through acquisitions) while rewarding shareholders via a competitive and growing dividend and share repurchases. To that end, it has increased its dividend by 58% since March 2020 (including 12% earlier this year) and recently authorized a new $5 billion share repurchase program. That plan will start after it completes its current $3 billion authorization from 2022 ($1.5 billion remaining at the end of the third quarter). Trane is spending heavily on repurchases these days because it believes the stock trades below its calculation of intrinsic value even after its rally this year. (One caveat: The stock's price-to-earnings ratio is well above its 10-year average, so it's likely the company is assuming its strong growth will continue.)

A compelling opportunity

Trane Technologies is delivering a standout performance in 2024. The climate solutions company is growing briskly, which should continue in the new year. That's giving it the funds to invest in innovation while also returning a growing amount of cash to shareholders. With management's high conviction in the company's value proposition, Trane looks like a compelling investment opportunity to consider as we head into 2025.

Don’t miss this second chance at a potentially lucrative opportunity

Ever feel like you missed the boat in buying the most successful stocks? Then you’ll want to hear this.

On rare occasions, our expert team of analysts issues a “Double Down” stock recommendation for companies that they think are about to pop. If you’re worried you’ve already missed your chance to invest, now is the best time to buy before it’s too late. And the numbers speak for themselves:

• Nvidia: if you invested $1,000 when we doubled down in 2009, you’d have $349,279!*
• Apple: if you invested $1,000 when we doubled down in 2008, you’d have $48,196!*
• Netflix: if you invested $1,000 when we doubled down in 2004, you’d have $490,243!*

Right now, we’re issuing “Double Down” alerts for three incredible companies, and there may not be another chance like this anytime soon.

See 3 “Double Down” stocks »

*Stock Advisor returns as of December 16, 2024

Matt DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.