Trane Technologies plcTTNYSE

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DCF Valuation

DCF Valuation Summary

Sell

Fair Value: $344.93 per share(market-calibrated)

-22.6%

Upside to Fair Value

Current

$445.83

Pure Model

$333.34

Fair Value

$344.93

Bull Case

$404.01

Bear Case

$267.35

Market Reality Check

Model Terminal Growth

2.25%

Market-Implied Growth

6.06%

Calibrated Growth

3.20%

Fair value uses 75% model / 25% market-implied terminal growth. Pure model: $333.34.

What's Driving This Ratingfor TT

✓

CapEx already efficient

CapEx at 1.47% of revenue is already at or below sector maintenance level. No normalization needed — cash conversion is already strong.

✓

Premium margins already priced in

EBIT margin of 23.31% is already well above sector average. The model holds this level — there's limited room for margin expansion to drive upside. Valuation depends primarily on revenue growth.

⚠

Analyst growth decelerates sharply

Revenue growth drops from 8.81% in Year 1 to 2.25% by Year 5 (per analyst consensus). This growth deceleration is a key reason the model may undervalue the stock if growth re-accelerates.

↔

Perpetuity and exit methods disagree

Perpetuity growth gives $280.01/share (13.7x terminal FCF) while exit multiple gives $386.67/share (23.7x terminal FCF). The 18x EV/EBITDA exit reflects current market multiples, while the perpetuity method with 2.25% growth is more conservative. The base case averages both methods.

🎯

Market pricing in higher long-term growth

To justify $445.83, the market implies 6.06% perpetual growth — 381bps above the model's 2.25%. This suggests the market sees additional growth catalysts (AI, new products, market expansion) not captured in analyst estimates.

✓

Strong cash flow conversion

Year 10 FCF/EBITDA conversion of 75.92% indicates efficient cash generation. FCF reaches $6.0B by Year 10 (18.92% FCF margin).

Weighted Average Cost of Capital (WACC)

Cost of Equity (CAPM)

Risk-Free Rate (Rf)4.50%

Beta (β)1.21

Market Risk Premium4.50%

*Using current implied premium (4.5% per Damodaran 2026), not historical (6.5%)

Cost of Equity (Re)9.95%

Cost of Debt

Pre-tax Cost of Debt5.02%

Tax Rate19.19%

After-tax Cost of Debt4.05%

Equity Weight (E/V)95.58%

Debt Weight (D/V)4.42%

WACC Calculation

WACC = (E/V × Re) + (D/V × Rd × (1-Tc))

WACC = (95.58% × 9.95%) + (4.42% × 4.05%)

= 9.69%

10-Year Free Cash Flow Projections(showing years 1, 3, 5, 7, 10)

Year	Year 1	Year 3	Year 5	Year 7	Year 10
Revenue	$23.2B	$26.7B	$28.5B	$29.8B	$31.9B
EBIT	$5.4B	$6.2B	$6.6B	$7.0B	$7.4B
Tax	$1.0B	$1.2B	$1.3B	$1.3B	$1.4B
NOPAT	$4.4B	$5.0B	$5.4B	$5.6B	$6.0B
+ Depreciation	$376M	$433M	$462M	$483M	$517M
- Capex	$341M	$393M	$420M	$439M	$469M
- Δ NWC	$50M	$45M	$17M	$17M	$19M
Free Cash Flow	$4.4B	$5.0B	$5.4B	$5.6B	$6.0B
Discount Factor	0.912	0.758	0.630	0.523	0.397
Present Value	$4.0B	$3.8B	$3.4B	$3.0B	$2.4B

FCF Formula: Free Cash Flow = NOPAT + Depreciation - Capex - Change in Net Working Capital

Terminal Value Calculation

Perpetuity Growth Method

Year 10 FCF$6.0B

Terminal Growth Rate2.25%

WACC9.69%

TV = FCF₁₀ × (1+g) / (WACC-g)

Terminal Value$83.0B

PV of Terminal Value$32.9B

Exit Multiple Method

Year 10 EBITDA$7.9B

Exit Multiple (EV/EBITDA)18.0x

TV = EBITDA₁₀ × Exit Multiple

Terminal Value$143.1B

PV of Terminal Value$56.8B

Valuation Summary

Perpetuity Growth Method

PV of Projected FCFs$32.6B

PV of Terminal Value$32.9B

Enterprise Value$65.5B

(-) Net Debt$2.9B

Equity Value$62.6B

Shares Outstanding224M

Price per Share$280.01

Exit Multiple Method

PV of Projected FCFs$32.6B

PV of Terminal Value$56.8B

Enterprise Value$89.3B

(-) Net Debt$2.9B

Equity Value$86.5B

Shares Outstanding224M

Price per Share$386.67

Pure Model Fair Value

$333.34

Average of perpetuity growth and exit multiple methods (before market calibration)

Sensitivity AnalysisPrice per Share

WACC ↓ / Growth →	1.25%	1.75%	2.25%	2.75%	3.25%
7.69%	$400.89	$409.95	$420.68	$433.58	$449.38
8.69%	$358.69	$364.86	$372.00	$380.33	$390.20
9.69%	$323.99	$328.37	$333.34	$339.03	$345.60
10.69%	$294.75	$297.96	$301.54	$305.58	$310.16
11.69%	$269.66	$272.07	$274.73	$277.68	$280.99

How to read: This table shows how the valuation changes with different WACC (discount rate) and terminal growth rate assumptions. Green = undervalued, Red = overvalued.

Scenario Analysis

Bear Case

$267.35

-40.0% vs current

• -25% vs analyst consensus
• Terminal growth: 2.0%
• Beta: 1.51

Base Case

$333.34

-25.2% vs current

• Analyst consensus
• Terminal growth: 2.3%
• Beta: 1.21

Bull Case

$404.01

-9.4% vs current

• +25% vs analyst consensus
• Terminal growth: 2.8%
• Beta: 1.03

Key Assumptions & Drivers• Industrials Sector

Growth Assumptions (Select Years)

Year 1 Revenue Growth8.81%

Year 3 Revenue Growth6.74%

Year 5 Revenue Growth2.25%

Year 7 Revenue Growth2.25%

Year 10 Revenue Growth2.25%

Terminal Growth Rate2.25%

Margin & Efficiency

Current EBIT Margin23.31%

Tax Rate19.19%

Historical Capex / Rev1.47%

NWC / Revenue2.67%

Key Drivers: Revenue growth, operating margin expansion, capex efficiency, and working capital management are the primary drivers of cash flow generation. Terminal value assumptions significantly impact final valuation.

Institutional-Grade Methodology

Actual Company Data: Revenue, EBIT, Capex, NWC, Tax Rate, Interest Expense, Beta

Market Assumptions: Risk-free: 4.5% (10Y), MRP: 4.5% (Damodaran 2026), Exit: 18x EV/EBITDA (Industrials sector)

This DCF model is for informational purposes only. Projections are based on assumptions that may not materialize. Past performance does not guarantee future results. Consult a financial advisor before making investment decisions.

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