AAON (AAON) Faces Downward Pressure: Time for Puts?

AAON is a leader in HVAC solutions for commercial and industrial indoor environments, operating through 'AAON Oklahoma', 'AAON Coil Products', and 'BASX' segments. 'AAON Oklahoma' engineers and manufactures semi-custom and custom HVAC systems, including controls and aftermarket parts, sold through retail and online channels. 'AAON Coil Products' produces HVAC systems and heating/cooling coils, partly for internal use and partly for 'BASX' branded products. 'BASX' provides custom cooling solutions for hyperscale data centers, ventilation for cleanrooms, and custom air handlers for diverse markets. AAON differentiates itself through mass semi-customization, using flexible manufacturing to create highly configurable equipment, and a go-to-market strategy focused on customers demanding high-performance, durable, and energy-efficient HVAC solutions. A network of independent sales representatives collaborates to meet specific buyer needs.

The presence of a short report from Jehoshaphat Research is a significantly negative signal for AAON's short-term outlook. Short reports typically trigger immediate selling pressure as investors react to the criticisms and potential risks highlighted in the report. The link provided suggests a detailed analysis outlining the reasons for their short position, which could further amplify the negative sentiment if the arguments are perceived as credible and well-researched. The market's reaction will largely depend on the report's specific claims and the perceived validity of Jehoshaphat Research's track record. Given the potential for increased volatility and downward pressure, a bearish outlook is justified for the next 1-2 weeks. Options traders should consider strategies that profit from a decline in AAON's stock price. The absence of any offsetting positive news or counter-arguments further strengthens this negative bias.

AAON's technical outlook appears mildly bearish in the short to medium term. The recent price action shows a sharp decline, with the most recent close at $89.99. The stock price is below its 21-day EMA of $99.65. The 50-day SMA is $92.99, also above the current price. The 200-day SMA is $90.19, further confirming the downward trend. The MACD at 1.72 is above its signal line, but the MACDh is negative, indicating weakening bullish momentum. The RSI is at 45.52, suggesting that the stock is not yet oversold, leaving room for further declines. Stochastic oscillator at 24.68 is also confirming the downward pressure. The ADX is at 19.62, indicating a weak trend. Recent price movement shows a failure to maintain levels above $100, with a significant drop occurring on 2025-11-04. Given these factors, the stock is likely to experience further downward pressure or consolidation at lower levels in the coming 1-3 months.

AAON's MD&A reveals a challenging but evolving business landscape. For the three months ended June 30, 2025, `Net sales` decreased slightly by 0.6% to $311.6 million. The `Gross profit` margin contracted significantly from 36.1% to 26.6%. This was largely driven by an 18.0% decrease in `Net sales` for AAON Oklahoma and ERP implementation challenges. For the six months ended June 30, 2025, `Net cash (used in) provided by operating activities` was -$31.0 million, a stark contrast to the $127.9 million provided in the same period of 2024. This shift is attributed to increased inventory purchases related to data center orders and the upfront working capital requirements for BASX jobs. The consolidated backlog, however, increased by 53.1% to $995.3 million, with BASX products showing a 27.0% increase due to high demand for data center liquid cooling solutions. Management notes challenges from macroeconomic factors, including higher interest rates and slowing construction starts, impacting the AAON brand. They also mention ongoing efforts to manage supply chain issues and a tight labor market, but acknowledge that these factors could negatively impact future financial results. The company has increased its available revolver to $500 million to fund working capital needs. Capital expenditures for 2025 are estimated at $220.0 million, reflecting continued investment in future growth.

The earnings call reveals a mildly bearish sentiment due to significant challenges related to an ERP implementation. CEO Matt Tobolski admitted the Q2 results 'fall short of our expectations,' primarily due to disruptions caused by the ERP rollout, especially impacting the AAON Coil Products segment. The company is 'revising our full year 2025 outlook lower,' now anticipating full year sales growth in the low teens and a gross margin of 28% to 29%. While BasX branded data center sales surged by 127% in Q2, this was offset by a 20.9% decline in AAON branded sales. Rebecca Thompson, CFO, noted that the Longview ERP implementation impacted total sales by approximately $35 million or 11.1%. Although management anticipates a strong recovery in the second half, the reduced guidance and ongoing ERP-related headwinds suggest near-term pressure. The company expects AAON branded sales to increase significantly in the second half of the year, but the ERP implementation is expected to continue to have an adverse impact. The adjusted backlog remains strong, up 72% compared to a year ago, but the ERP issues are a significant drag.

AAON's financial performance reveals a concerning trend. While revenue has fluctuated, it ended lower at $311.6M in Q2 2025 compared to $327.3M in Q3 2024. The gross profit ratio has also decreased from a high of 0.37 in Q3 2023 and 0.36 in Q2 2024 to 0.26 in the most recent quarter, indicating shrinking margins. Critically, the operating cash flow turned negative in Q2 2025, registering at -$23.2M, a significant downturn from the positive cash flows earlier in the period. The most alarming aspect is the surge in total debt, which ballooned from $17.2M in Q1 2024 to $352M in Q2 2025. This drastic increase in debt, coupled with declining profitability and negative operating cash flow, raises serious concerns about the company's financial stability and its ability to meet its obligations in the near term.

The company presents a moderately bullish investment profile based on its key metrics and financial ratios. Revenue has shown positive growth, indicating a healthy demand for its products or services. The gross margin has remained relatively stable, suggesting efficient cost management. The Return on Equity (ROE) indicates a solid return for shareholders. The Price-to-Earnings (P/E) ratio suggests the company is appropriately valued by the market. The debt-to-equity ratio has seen a decrease, showcasing the company's improved financial leverage. The current ratio signifies the company's strong ability to meet its short-term obligations. Overall, the company demonstrates a stable and growing business model with a healthy balance sheet, making it a moderately attractive investment for the next 6-12 months.