Value Line has initiated coverage of AAON (AAON) in its flagship product, The Value Line Investment Survey. AAON designs, manufactures, and sells semi-custom heating, ventilation, and air conditioning equipment for commercial and residential use. The company’s products include rooftop units, chillers, air-handling units, make-up air units, heat recovery units, commercial self-contained units, and coils. AAON has offices and manufacturing facilities in Tulsa, Oklahoma (its headquarters) and Longview, Texas. The company has almost 1,200 employees. In addition to its own sales staff, AAON uses independent manufacturer representatives’ organizations to market its products in the United States and Canada and has an international sales organization.

The company was founded by Norman Asbjornson (still the president and chief executive officer) in 1988 with the acquisition of the heating and air conditioning division of the John Zink Company. It acquired Coils Plus in 1991, and went public at the end of the following year. The company’s stock trades on NASDAQ.

In 2013, AAON posted net profit of $37.5 million on sales of $321.1 million. About 55% of its top line was generated from renovation and replacement markets and 45% from new construction. AAON had some foreign sales, but these amounted to less than 10% of the total. Management estimates that AAON has a 15% market share in rooftop units and shares of just 1%-3% in other product lines. The company’s primary competitors are Lennox (LII), Trane (a division of Ingersoll-Rand (IR)), York (a division of Johnson Controls (JCI)), and Carrier (a division of United Technologies (UTX Free United Tech. Stock Report)).

The company is performing well. The total return of its stock for the five-year period from 2009 through 2013 was over 350%, far exceeding the Standard and Poor’s 500 Index and moderately outd the company’s peer group. In 2013, sales rose 5.9% but net profit soared 36.9%. Gross margins rose due to price increases, which accounted for about half of the top-line growth, and a decline in the cost of raw materials such as copper, steel, and aluminum. AAON’s return on average common equity was a very healthy 24.8%. The company has no debt and is using some of its cash to pay dividends and repurchase its common stock. Dividends of $0.10 a share are paid semiannually. Note that a three-for-two stock split was effective on July 2, 2013.

Mr. Asbjornson (who has a stake of about 20% in AAON) stated in the company’s fourth-quarter earnings release, “we anticipate AAON having another good year in 2014.” Its backlog was $48.8 million as of March 1, 2014.

Although the company fared well in 2013 and appears to have good prospects for this year, its stock is not suitable for every investor. With a dividend yield of less than 1%, AAON shares may not appeal to income-oriented accounts. Also, the stock is too volatile for conservative investors.

AAON faces the standard risk factors of any company in this business. A downturn in the economy or an increase in raw materials prices would hurt the company. Moreover, the aforementioned competitors are considerably larger than AAON. Warranty and product liability claims are a potential worry. Finally, Mr. Asbjornson is 78 years old, so succession planning is a concern.

For a more thorough look at AAON, and the particular investment merits of its stock, subscribers should examine our full report in The Value Line Investment Survey.

At the time of this article’s writing, the author did not have a position in any of the stocks mentioned.