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At the start of this year, I believed that shares of Carrier Global (NYSE:CARR) were carrying a great deal of momentum into 2024. Since the company was spun-off from United Technologies (which itself now belongs to RTX (RTX)), the company has quickly built up a solid value creating track record, as it has actively managed its portfolio.
The company over time has turned its conglomerate into a pure play on HVAC in what seems to be a well-executed strategy. I applaud this move. Shares trade at a small premium to the market, which seems fair. I am waiting for opportunities to pick up shares on unexpected dips.
Carrier – A Promising Conglomerate Becoming A HVAC Business
Carrier was a mini conglomerate which focused on HVAC, refrigeration, fire & security, at the time of the spin-off from United Technologies back in 2020.
The company generated about $18.6 billion in sales at the time (in 2019) as it reported operating profits of $2.6 billion in the meantime, for margins equal to 14% of sales. Most of the business was focused on HVAC, a $10 billion business, with the other activities responsible for the remainder of sales.
Expectations were very low as shares started trading at $14 per share, resulting in a dirt cheap valuation with earnings power reported around $2 per share, for a mere 7 times earnings multiple, in part because of uncertainty on the earnings power of the business and a 3 times leverage ratio employed.
The company quickly started managing its portfolio, as it sold the Chubb fire and security business in a $3 billion deal in 2021. The stock had seen a massive re-rating. Shares had more than tripled, all while earnings power had just risen modestly above the $2 per share mark.
Refining The Portfolio
After shares peaked at levels around the $60 mark in the summer of 2021, they have largely traded in a $35-$60 range ever since, now revisiting the highs of this range again.
In the meantime, the company has continued work on redefining its portfolio. For the year 2022, the company generated $20.4 billion in sales (following the Chubb divestment) with earnings reported at $2.34 per share. The company guided for 2023 sales to advance to $22 billion, with earnings seen up to $2.55 per share.
Net debt of $5.3 billion came down a long way, with EBITDA reported at $3.2 billion in 2022. Trading in the forties in the spring of 2023, the investment case looked a lot more compelling at an earnings multiple in line with the wider market, with the enterprise valuation of the firm standing at $42 billion at the time.
This thesis changed in a big way when Carrier announced a $13 billion deal to acquire Viessmann Climate Solutions in April of last year, in order to benefit from the German/European energy transition from natural gas into electricity. The deal was set to add EUR 4 billion in sales and EUR 0.7 billion in EBITDA, revealing that the activities were acquired at a meaningful premium compared to its own valuation.
An 80% cash component meant that debt would increase in a huge way, as the higher multiples made the deal dilutive at first. Shares fell from $45 to $40 per share upon the announcement of the transaction, which felt like an overreaction.
After this initial scare reaction, shares recovered to $56 at the start of this year. This came as the company has seen solid operating momentum, with second quarter sales up 15%, third quarter sales up 5%, with full-year earnings by now seen at $2.70 per share.
With shares trading at a 21 times earnings multiple ahead of closing of the Viessmann deal in January, net debt was addressed with additional asset divestments. This came as the company reached a $4.95 billion deal with Honeywell (HON) to sell the Global Access Solutions business, the remainder of the security business. The company furthermore reached a $775 million deal with joint-venture partner Haier to sell the global commercial refrigeration business.
With many moving targets, the net takeaway should be positive in 2024. Hence, I believed that the company should see solid sales growth compared to 2023, but I believed that earnings might take a small beating. Nonetheless, much was overshadowed by the fact that the company became a stronger and better positioned business.
Good News
Hoping to buy a dip towards the $50 mark, but shares have mostly traded in a $55-$60 range since the start of the year. In February, Carrier reported an 8% increase in 2023 sales to $22.1 billion. The company reported a $2.3 billion operating profit number, after a $384 million special expense. GAAP earnings were reported at $1.58 per share, as adjusted earnings were reported at $2.73 per share.
The company guided for 2024 sales at a midpoint of $26.5 billion, with many moving parts, including mid-single digit organic sales growth, a 20% sales contribution from Viessmann, and a 5% sales impact from divestments. Contrary to my concerns that modest dilution would be incurred, the company actually guided for earnings to advance towards $2.80-$2.90 per share.
In March, the company announced another divestment, as it sold its Industrial Fire business to Sentinel Capital Partners for an enterprise valuation of $1.425 billion. The leader in fire detection and suppression solutions employs some 1,400 workers across 20 countries. Few financial details on the contribution of these activities were announced. Similar to recent divestments, net proceeds trail the headline number quite a bit, with net proceeds pegged at $1.1 billion.
Toward the end of April, the company reported a 17% increase in first quarter sales to $6.2 billion amidst 2% organic growth rate reported. With organic growth coming in a bit slower, the company cut the full year sales guidance to $26.0 billion, although the company maintained the full year adjusted earnings per share guidance. Sales are seen a bit lower following the sale of the Industrial Fire business, as well as a slower start to the year for Viessmann, which is pressured by subsidy regime changes and declining natural gas prices.
Net debt is reported at $15.6 billion as the deal with Viessmann closed, but the three other deals still have to close, which combined are set to yield about $5.5 billion in proceeds. The company believes that it is still on track to return to 2 times leverage this year.
A Final Word
I completely understand why shares have seen modest gains, as the company actually guides for modest earnings growth this year, contrary to my prediction. Consequently, shares trade at a reasonable 21-22 times earnings multiple at $60 per share. Moreover, pro forma leverage ratios are quickly coming down, despite some leakage incurred with recent divestments.
The truth is that the valuation now looks a lot more friendly than this time in 2021 when shares last traded at these levels. All this means that appeal has increased a great deal as Carrier has focused the business a lot more, having turned from a conglomerate to a pure play HVAC business.
Amidst all this, I am warming up to Carrier here, after it trades at a more modest valuation. It is clear that there is more potential in the tank after Viessmann saw a tough first quarter with sales down 12% due to lower PV orders. A recovery in this business and continued growth in Data Centers could easily push earnings up to $3 per share (or more) in 2025.
Comforting is that CEO David Gitlin will likely continue to lead the business as he has committed to Carrier, after there were rumors that he would become CEO of Boeing (BA).
Amidst all this, I am reiterating my upbeat stance, as I am looking for unexpected sell-offs in order to get involved with Carrier again.
