Carrier Global: Is This HVAC Leader Still a Buy?
A closer look at Carrier’s transformation, growth potential, and current valuation.
Back in May 2023, we covered Carrier, the largest HVAC manufacturer in the U.S. At the time, we highlighted that Carrier was trading at a 30% discount relative to its fair value. Based on our analysis and valuation, we initiated a position, allocating approximately 4% of our portfolio.
Our investment thesis was based on the following key points:
Strategic Focus on HVAC: Carrier’s shift towards becoming a pure-play HVAC company promised margin expansion.
Market Leadership: As the largest HVAC player in the U.S., Carrier’s scale is difficult to replicate.
Favorable Market Dynamics: Industry growth supported by federal mandates, increasing environmental awareness, and incentives for energy-efficient HVAC systems.
Viessmann Climate Solutions Acquisition: Positioned Carrier to capitalize on the growing demand for heat pumps in Europe.
For more insights on Carrier, check out our deep dive and investment thesis here.
Fast forward to today, Carrier’s stock trades 65% higher than our initial purchase price and at valuation multiples that now seem a bit stretched relative to historical averages. In light of this, we believe it’s time to reassess our thesis.
In this report, we provide an updated analysis of Carrier’s performance, a look at its industry dynamics, and a refreshed valuation to determine whether the company remains an attractive investment.
1. HVAC Strategic Transformation
2024 marked a transformative year for Carrier. The Company successfully divested all five businesses outside of HVAC and Transport Refrigeration, achieving $10 billion in gross proceeds. These divestments included:
Fire and Security Segment: Access Solutions ($4.95B), Industrial Fire ($1.43B), and Commercial & Residential Fire ($3B).
Commercial Refrigeration: ($775M).
Management executed these divestitures exceptionally well, both in terms of timing and maximizing value. As CEO David Gitlin stated:
“In terms of divestitures, some analysts modelled that we would yield $7 billion or so in gross proceeds over the course of 2 to 3 years. Thanks to the efforts of our corporate team, those in the businesses that have performed so well and our advisers, we reached agreements on all 5 deals in just over a year and will realize more than $10 billion in gross proceeds, which represents an aggregate EBITDA in the mid-teens.”
These strategic moves have significantly reshaped Carrier’s sales mix, with HVAC now accounting for 84% of total sales, up from 53% in 2020.
Source: Carrier Earnings Releases, FinChat.io (affiliate link with a 15% discount for StockOpine readers), StockOpine Analysis
The “new” Carrier projects approximately $22 billion in annual sales for FY24, with the following approximate breakdown:
Global Commercial HVAC: $6 billion.
Residential & Light Commercial (North America): $7 billion.
Residential & Light Commercial (Europe): $4 billion.
Residential & Light Commercial (Asia): $2 billion.
Transport Refrigeration: $3 billion.
This more streamlined and focused Carrier is positioned in higher-growth segments, supported by multiyear secular tailwinds and a stronger margin profile.
Source: Carrier Q3’24 Presentation
Strategic Priorities
Carrier’s focus for the next few years centers on execution and seizing growth opportunities in HVAC. Key priorities include:
Sustaining Double-Digit Aftermarket Growth: Leveraging its large installed base to drive recurring revenue.
Expanding Commercial HVAC Opportunities: Particularly in data centers, where Carrier has seen a 250% increase in orders year-to-date, and in mega-projects driven by factors such as reshoring initiatives, with recent example the semiconductor manufacturing facilities in U.S.
Transitioning to 454B Refrigerants: These higher-priced refrigerants are expected to boost the Residential and Light Commercial business in North America.
Revitalizing Viessmann Climate Solutions (VCS): After a temporary slowdown in demand for heat pumps and solar PV in Europe, Carrier aims to return VCS to growth as well as expanding its profit margins through synergies and organic revenue growth.
Management anticipates that these initiatives will drive 6-8% organic sales growth annually and 50 basis points of margin expansion per year, supported by productivity, higher mix of aftermarket sales as well as cost reductions in manufacturing, sourcing, and General & Administrative expenses.
2. Carrier’s Financial Performance: Growth Metrics and Profitability Trends
To assess Carrier’s recent performance, it’s more insightful to focus on organic revenue growth and adjusted operating margin, as total revenue growth and GAAP profitability have been distorted by the recent divestments and the VCS acquisition.
Source: Carrier Earnings Releases, StockOpine Analysis
Carrier’s organic revenue growth, which had been decelerating throughout FY23 mainly due to softness in North America Residential HVAC, bottomed in Q4’23. Since then, growth has rebounded, accelerating to 2% in Q1’24 and further to 4% in Q3’24. This improvement was driven by continued strength in Commercial HVAC, up nearly 20%, as well as double-digit growth in North America Residential HVAC. Organic growth was also supported by growth in total organic growth of orders both in Q2’24 and Q3’24, which spiked by 30% and 20% respectively.
It’s important to note that growth accelerated despite the headwinds in Residential and Light Commercial HVAC across Europe and China, which continue to show weakness.
In terms of profitability, Carrier has demonstrated consistent improvement in adjusted operating margin since Q2’23, with one exception: Q3’24, where adjusted operating margin declined by 40 basis points, primarily due to a 130 bps headwind from VCS. Despite this, year-to-date adjusted operating margin is up 120 bps, driven by organic growth, productivity improvements and a higher mix of HVAC and aftermarket sales.
For the full year, management expects the adjusted operating margin to reach 15.5%, representing 150 basis point improvement year-over-year.