Carrier Global - Investment Thesis

Following our detailed analysis on Carrier Global (Carrier: The Path to Becoming a Global Climate Champion) we came to the conclusion that Carrier ($CARR) deserves a spot in our portfolio. As a result, we decided to open a position at a price of $41.4, allocating 3.8% of our portfolio.

In the below summary, we share the rationale of our decision.

Brief overview

• Carrier Global (“Carrier”, “Company”) is a leading manufacturer of heating, ventilation and air conditioning (HVAC), refrigeration and building automation equipment.

• Carrier operates through three main segments: HVAC, Refrigeration, and Fire & Security with HVAC being the dominant revenue driver.

• Key Financials:

  • Revenue Trailing twelve months (“TTM”) Q1’23: $21B, 3.2% CAGR during FY17 to TTM Q1’23

  • Operating income TTM Q1’23: $2.4B (margin of 11.6%), -1.5% CAGR during FY17 to TTM Q1’23

  • Cash and cash equivalents of $3.3B compared to total debt and lease liabilities of $9.4B.

• Its stock price has a 52-week high of $49.2 and a 52-week low of $33.1, whereas it currently trades at $40.89 with a Market Cap of $34.14B (as of 26^th May 2023).

• Valuation multiples:

  • TTM EV/EBITDA of 14.6x (3 Year average of 16x)

  • TTM EV/Sales of 2x (3 Year average of 2.2x)

Thesis

We believe that Carrier presents a favorable investment opportunity today for the following reasons:

1. Favorable Industry Dynamics: Carrier is well-positioned to capitalize on the growing demand for energy-efficient HVAC systems, driven by federal mandates, environmental awareness, and incentives for homeowners (Inflation Reduction Act).

2. Strategic Focus on HVAC: Carrier's strategic decision to exit the Fire & Security and Commercial refrigeration businesses, enable Carrier to focus on its core strength in HVAC. This shift will not only reduce debt load after the Viessmann Climate Solutions acquisition but will also enhance operating margins as HVAC is the most profitable segment of Carrier.

3. Viessmann Climate Solutions – The acquisition of Viessmann Climate Solutions further enhances Carrier's market reach in Europe. This strategic move enables Carrier to tap into the growing market for heat pumps in Europe and expand into the solar PV and home battery solutions, aligning Carrier with the industry shift towards renewable energy.

4. Scale – As one of the largest HVAC manufacturers, Carrier enjoys economies of scale, allowing it to invest significantly in R&D and CAPEX. Its extensive distribution network and brand recognition act as barriers to entry for competitors, providing Carrier a competitive edge.

5. Margin Expansion – By concentrating on the higher margin profile HVAC segment and leveraging its extensive installed base, Carrier can increase aftermarket sales which typically offer higher margins and are less susceptible to economic downturns. Additionally, softening of the supply chain is expected to reduce freight and manufacturing costs, further contributing to margin improvement.

6. Valuation – Under our DCF model the estimated price of Carrier is $53.3, higher than its current price by 29%, with an expected IRR over a 5-year period of 16.1%. This valuation suggests that Carrier is undervalued, offering an attractive entry point.

Source: StockOpine analysis

Risks

1. Acquisitions - Carrier's extensive involvement in acquisitions and the significant amount of goodwill, totaling $10 billion (or 38% of total assets) on its balance sheet pose a risk. The pursuit of large acquisitions such as the one of Viessmann Climate Solutions may carry the potential for unsuccessful outcomes and value destruction.

2. Regulations - Stricter HVAC industry regulations pose a risk of increased capital expenditures for manufacturers like Carrier. Compliance with evolving regulations and market demands may necessitate substantial investments in new technologies and product development. Non-compliance with these regulations could lead to operational, compliance, and reputational risks for Carrier.

3. Litigation – The Company is subject to litigations with the Aqueous Film forming Foam appearing to be the most significant. Management cites an inability to assess the probability of liability or estimate potential damages and the lack of disclosure regarding potential financial impacts poses a risk.

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