A recurrent theme here has been the opportunity provided by a large installed base, but that is aged and entering the prime years for repair if not replacement. For example, in 2023, we discussed how an older car fleet would provide a long tailwind for auto parts retailers. More recently, we discussed the opportunity present in our nation’s old housing stock. In my next few articles, I will discuss several more examples of critical infrastructure that represent aged installed bases that are ripe for renewal, and first among them is HVAC.
More than a century ago, Willis Carrier designed the first modern air conditioning unit, and the device quickly caught on as a necessity to make the humid North American summers more bearable. As it stands, close to 90% of all U.S. households feature air conditioning of some kind, including most houses built before 1950, which have been modified to accommodate something Americans increasingly cannot live without. According to HVAC distributor Watsco, the installed base of central A/C units in the United States stands at about 120 million units, a series that has grown without interruption since 1980 (source – Watsco IR):
What is more, the Construction Financial Management Association estimates that some 92,000,000 units, which represents more than 75% of the installed base, is more than ten years old. Given that the useful life of an A/C unit can range from ten to twenty years depending on usage rates and operating conditions, and given that A/C has become a necessity for households, there would appear to be a very long runway for those who repair and replace A/C systems.
The opportunity is just as strong on the commercial side as it is with residential units. Earlier this year, Lennox’s Geoff Dethlefsen commented on the opportunity:
“You look at the [commercial] installed base from that 2000 to 2005 time period, there was a massive installed base put into service. And when our units get to be about 15, 20 years, that’s when they typically need to be replaced. And there tends to be a catalyst there with the repair, the cost of repairing them really goes up, a lot of parts and service in that time frame. So we’re now coming up in that zone and even talking to some of our customers, they’re planning 2, 3 years out for this wave, talking to us about how do we prepare for that.”
An additional catalyst for a replacement cycle to newer, more efficient systems is the increased demand on the nation’s power grid from electric vehicle adoption and data center demand. Carrier’s David Gatlin mentioned this dynamic late last year at the Baird Industrial Conference:
“We’ve been meeting with utilities…There’s a lot of interest [in smart energy solutions] because, obviously, the capacity of the grid can’t support the demand in the United States with the increased demand from data centers.”
As more people in the developing world adopt central cooling, and as large installed bases in North America come due for repair and replacement, including incentives to modernize, the future would appear bright for the HVAC industry.
Both the author and clients of Fortune Financial Advisors, LLC, own shares of Carrier.
