Spin offs, breakups, and divestitures often make good investment opportunities as the smaller company becomes more focused on higher growth avenues and intelligent cost cutting. This appears to be the case for Carrier Global Corp (CARR, Financial) after its spin-off from United Technologies Corporation in 2020.
The company provides heating, ventilating, and air conditioning (HVAC), refrigeration, fire, security, and building automation technologies on a worldwide basis. The HVAC segment provides products and services that meet heating, cooling, and ventilation needs of residential and commercial customers. Products include air conditioners, heating systems, controls, and aftermarket components.
Carrier's Business Segments
The Refrigeration segment provides transportation refrigeration and other digital solutions for trucks, trailers, shipping containers, and intermodal applications. The Fire & Security segment provides various residential, commercial, and industrial technologies, including fire, flame, gas, smoke, and carbon monoxide detection, portable fire extinguishers and fire suppression systems. Top brands include Autronica, Det-Tronics, Edwards, Aritech, Fireye, GST, Kidde, LenelS2, Marioff, Onity, Carrier, Toshiba, Automated Logic, Bryant, CIAT, Day & Night, Heil, NORESCO, and Riello.
In April 2023, Carrier Global Corp (CARR, Financial) announced plans to exit its Fire & Security and Commercial Refrigeration businesses.
Company History and Market Capitalization
The company has a history dating back to 1915 but the current structure was incorporated in 2019. The company expects to generate approximately $22.5 billion in revenues this year and currently has a market capitalization of $44.9 billion.
EU Legislation and Its Impact
In 2023, Germany passed controversial legislation that moved towards phasing out oil and gas driven heating systems to be replaced by non-fossil fuel systems such as heat pumps. This is in line with the EU's goal to install an additional 10 million heat pumps by 2027. If traditional gas-fired boiler systems are phased out eventually, EU demand for heat pumps could exceed 30 million units over time. Carrier Global Corp (CARR, Financial) is a major producer of heat pumps in international markets.
The German law was eventually weakened as well as similar legislation in France which led to near-term demand slowdown for heat pumps. However, over the long-term, the company should still benefit from increased heat pump demand.
Carrier's Financial Performance
Carrier Global Corp (CARR, Financial) recently reported 2nd quarter 2023 financial results which showed revenues increasing 15.0% compared to the prior year period to $6.0 billion. Organic growth increased 6.0% driven by strength in the HVAC segment with commercial HVAC up high-teens and North Americas residential and light commercial HVAC up 5.0% organically. The difference between organic sales growth and reported sales growth was related to recent acquisitions.
GAAP operating income decreased 40.0% in the 2nd quarter to $489 million which was largely attributed to a one-time loss of $293 million associated with the deconsolidation of the Kidde-Fenwal subsidiary following its Chapter 11 filing. An additional one-time charge was the $111 million unrealized loss on the mark-to-market valuation of forward contracts associated with the Viessmann Climate Solutions acquisition. Adjusted operating income increased 12.0% to $964 million. Net income was $199 million and adjusted net income was $670 million.
Financial Results for the First Half of 2023
For the six month period ending June 30, 2023, operating cash flow was $504 million and with capital expenditures of $144 million, free cash flow was $360 million. Cash dividend payments were $309 million.
Cash balances at quarter end totaled $3.2 billion and total debt was $8.8 billion. With expected EBITDA of approximately $3.5 billion in 2023, the company’s leverage ratio is under two times.
Carrier Global Corp (CARR, Financial) Chairman & CEO David Gitlin stated, "We delivered another quarter of strong financial performance led by double-digit growth in commercial and light commercial HVAC, global truck and trailer, aftermarket and controls, which shows the strength of our execution, end-markets and backlog. Given our strong performance in the first half of 2023, we are now raising full year guidance for organic revenue growth, adjusted operating margin, and adjusted EPS."
Valuation and Analyst Estimates
The company provided EPS guidance in the range of $2.55 to $2.65 as well as a free cash flow outlook of approximately $1.9 billion. Consensus analyst EPS estimates for this year is $2.63 and for 2024 the EPS estimate is $2.86. That puts the stock trading at 20.4 times earnings. The EV/EBITDA ratio based on 2023 estimates is approximately 13.5 times.
The Gurufocus DCF calculator creates a value of $66.00 when using $2.63 as the EPS starting point and long-term growth rate of 15%.
There are 14 Wall Street analysts that cover the company with and an average price target of $60.00 which includes a high target price of $68.00 and a low target of $48.00. There are five buy ratings and nine hold ratings.
The company currently pays an annualized dividend of $0.74 which equates to a dividend yield of 1.37%. The company has repurchased $1.9 billion in common stock over the past two fiscal years.
Guru Trades and Investment Activity
Gurus who have purchased Carrier Global Corp (CARR, Financial) stock recently include Robert Olstein (Trades, Portfolio) and Ken Fisher (Trades, Portfolio). Gurus who have reduced their holdings include John Hussman (Trades, Portfolio) and Diamond Hill Capital (Trades, Portfolio).
Conclusion
With a history dating back to 1915, Carrier Global Corp (CARR, Financial) has seen its share of ups and downs as well as a large number of economic cycles. The company seems to persevere over time due to M&A activity and strong sales growth on average.
Despite macroeconomic exposure to the commercial and residential real estate markets, the stock may represent a solid long-term investment opportunity for growth investors.
