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Carrier Global Corporation
May 20, 2024
Carrier Global Corporation
Ticker: CARR.NYSE
Addition to:
✅ SENSU Watchlist
Addition Date: May 20, 2024
Price per Share: 65.98 USD
⭐⭐⭐ Quality Score | ⭐⭐⭐⭐ Value Score | ⭐⭐⭐⭐ Growth Score |
TABLE OF CONTENTS
THE COMPANY
Carrier Global Corporation is a leading provider of intelligent climate and energy solutions with a rich history dating back to 1915 when it was founded by Willis Carrier, the inventor of modern air conditioning. The company has evolved significantly over the years, expanding its product portfolio and global reach. In 1979, Carrier was acquired by United Technologies Corporation (UTC) and operated as a subsidiary for several decades.
A major milestone occurred in 2020 when Carrier was spun off from UTC as an independent, publicly-traded company. This move allowed Carrier to focus on its core competencies and pursue its own strategic initiatives.
Carrier's business is organized into three main segments:
HVAC: This is Carrier's largest segment, providing heating and cooling solutions for residential and commercial buildings. Their products include air conditioners, heat pumps, and building automation systems.
Refrigeration: This segment focuses on transport refrigeration and commercial refrigeration products. They serve industries like food retail and transportation to ensure the cold chain integrity of perishable goods.
Fire & Security: This segment offers a range of products and services for fire detection, suppression, and building access control.
Carrier has a global presence, with operations in over 160 countries. The company benefits from several long-term trends, including urbanization, climate change, and increasing food safety requirements.
In recent years, Carrier has been focusing on innovation, particularly in areas like energy efficiency and digital solutions. They've also been pursuing strategic acquisitions to expand their capabilities and market reach. For example, in January 2024, Carrier completed the acquisition of Viessmann's climate solutions business, significantly expanding their presence in the European residential HVAC market.
Carrier's business model is built on their strong brand portfolio, which includes well-known names like Carrier, Toshiba, and Kidde. They sell their products through various channels, including distributors, dealers, and directly to customers.
STOCK PRICE
The dynamic background color reflects overall market valuation, allowing you to quickly assess both stock-specific trends and market conditions at a glance.
Why logarithmic? It displays percentage changes uniformly, making price movements easily comparable across different ranges. A 100% increase appears the same whether from $10 to $20 or $100 to $200.
MANAGEMENT ANALYSIS
Meet the CEO: David Gitlin
David Gitlin has been the CEO of Carrier Global Corporation since its spin-off from United Technologies in 2020. With over 20 years of experience in the aerospace and building systems industries, Gitlin brings a wealth of knowledge to his role leading Carrier.
Prior to becoming CEO, Gitlin held several senior leadership positions at United Technologies, including President and COO of Collins Aerospace and President of UTC Aerospace Systems. This background gives him deep insight into Carrier's core HVAC and refrigeration businesses.
Under Gitlin's leadership, Carrier has undergone a significant strategic transformation to focus on its high-growth HVAC segment. In 2023, he spearheaded the $13 billion acquisition of Viessmann Climate Solutions to expand Carrier's presence in the European heat pump market. Gitlin has also overseen the divestiture of Carrier's fire and security businesses to streamline operations.
Colleagues describe Gitlin as a decisive leader who isn't afraid to make bold moves to position Carrier for long-term success. He has emphasized innovation and sustainability, setting ambitious environmental goals for the company. Gitlin's vision is to establish Carrier as the premier provider of healthy, safe and sustainable building solutions globally.
Employee Sentiment
The Positives
Carrier employees generally praise the company for its competitive compensation and benefits package, including good salaries, bonuses, and a strong 401k program. Many reviewers highlight the positive work-life balance, with flexible work arrangements and ample time off. The company is commended for its focus on innovation and sustainability, providing opportunities to work on cutting-edge technologies in the HVAC and climate solutions space. Employees appreciate the global scale of the company, which offers diverse career opportunities and the chance to work with talented colleagues from around the world. The company's commitment to ethics and compliance is frequently mentioned as a positive aspect. Many reviewers also note that Carrier provides good training and development programs, including tuition reimbursement for further education.
The Negatives
A common theme in negative reviews is the perception of poor leadership and management, particularly at the middle and upper levels. Many employees describe a lack of clear direction, frequent strategy changes, and poor communication from leadership. There are numerous complaints about a bureaucratic and slow-moving corporate culture, with decisions taking too long and processes being overly complex. Some reviewers mention high turnover rates, especially in certain departments, leading to understaffing and increased workloads for remaining employees. There are concerns about limited career advancement opportunities, with some employees feeling that promotions are based more on tenure or internal politics than merit. The company's cost-cutting measures, including layoffs and outsourcing, are a source of anxiety for many employees. Some reviewers also mention outdated systems and technologies, particularly in IT infrastructure.
"There are a lot of people scared of digital transformation, specifically in leadership roles. This has started to challenge the norms of their day to day and now they feel like they're going to be replaced - which is true if they don't get it together."
FINANCIAL ANALYSIS
Earnings Yield
Carrier's earnings yield has exhibited substantial volatility over the past seven years, reflecting the company's changing profitability and market valuation dynamics. The trend began with a robust earnings yield of 11.8% in 2017, which then surged dramatically to a peak of 26.3% in 2018. This spike likely resulted from a combination of strong earnings performance and potentially undervalued stock price during that period.
However, the trend reversed sharply after 2018, with the earnings yield declining to 20.4% in 2019, then further dropping to 6.1% in 2020. This downward trajectory continued, reaching 3.5% in 2021, before a slight uptick to 10.2% in 2022. The most recent data shows a further decline to 2.8% in 2023, marking the lowest point in the observed period.
The overall downward trend in earnings yield suggests that Carrier's profitability has not kept pace with its market valuation growth. The company's spin-off from United Technologies in 2020 and subsequent reorganization efforts may have contributed to this trend.
The most recent trailing twelve months (TTM) figure of 5.6% indicates a modest improvement from the 2023 low, potentially signaling a stabilization or slight recovery in the company's earnings relative to its market value. However, this figure remains significantly below the historical highs, particularly the 2018 peak.
Return on Invested Capital
Carrier's Return on Invested Capital (ROIC) has exhibited a concerning downward trajectory over the past six years, reflecting fundamental challenges in the company's ability to generate profits from its invested capital. The ROIC peaked at an impressive 18.41% in 2018, showcasing strong operational efficiency and value creation. However, this metric has since experienced a steady decline, reaching 6.79% in 2023, with only a brief respite in 2022 when it slightly increased to 11.76%.
This persistent downward trend can be attributed to several factors. The company has undergone significant structural changes, including its spin-off from United Technologies in 2020 and subsequent strategic acquisitions and divestitures. These transformative actions, while potentially beneficial in the long term, have likely disrupted short-term operational efficiency and capital allocation.
Furthermore, Carrier has faced headwinds from global supply chain disruptions, inflationary pressures, and market volatility, particularly in the wake of the COVID-19 pandemic. These external factors have squeezed profit margins and increased the cost of capital, directly impacting ROIC. The company's substantial investments in research and development, digital initiatives, and sustainability efforts, while crucial for long-term competitiveness, may also be temporarily suppressing returns.
The most recent trailing twelve months (TTM) ROIC figure of 6.29% suggests that these challenges persist, indicating ongoing pressure on Carrier's ability to create value from its investments. This continued decline raises concerns about the company's operational efficiency, pricing power, and overall market positioning.
Price-to-Book Ratio
Carrier's Price-to-Book (P/B) ratio has undergone a remarkable transformation over the past six years, reflecting significant changes in investor perception and company performance. In 2018-2019, the P/B ratio hovered around 0.74, suggesting investors valued Carrier at less than its book value. This low valuation likely stemmed from Carrier's position as a subsidiary of United Technologies Corporation at the time, with limited visibility as a standalone entity.
The landscape shifted dramatically in 2020 when Carrier was spun off as an independent company. This newfound independence, coupled with increased demand for HVAC and refrigeration solutions during the pandemic, sparked investor interest. As a result, the P/B ratio skyrocketed to 6.95 in 2021, indicating investors were willing to pay nearly seven times the company's book value.
Since then, the P/B ratio has moderated but remains elevated at 5.54 in 2023. This sustained high valuation suggests ongoing investor optimism about Carrier's future prospects. The company's focus on innovative, energy-efficient solutions and its strong market position in the HVAC industry likely contribute to this positive sentiment.
However, the current P/B ratio of 5.54 is still significantly higher than the pre-2020 levels, raising questions about potential overvaluation. While the higher ratio could be justified by Carrier's improved growth prospects and profitability as an independent company, it also implies high expectations that Carrier must meet to maintain its valuation.
MOST SIGNIFICANT MOATS
Carrier has established itself as a leading brand in the HVAC industry, with a history dating back over a century. The company holds the #1 position in the US Residential HVAC market and has strong market shares in other segments. This brand recognition and market leadership create customer loyalty and make it difficult for new entrants to compete effectively. Customers often trust established brands like Carrier for critical home and building systems, giving the company pricing power and repeat business.
Carrier has a massive installed base of over 100 million residential units. This creates a significant aftermarket opportunity for service, maintenance, and replacement parts. The average life of a unit is around 14-18 years, providing a steady stream of recurring revenue as customers eventually need to replace or upgrade their systems. This large installed base acts as a barrier to entry for competitors and provides Carrier with a captive customer base for future sales.
Carrier has established a strong distribution network, particularly in North America. The company uses a distributor-led model, forming partnerships with companies like Watsco. This network creates a barrier for new entrants who would struggle to build similar relationships and reach customers effectively. The distribution network also allows Carrier to maintain close relationships with installers and contractors, who often influence purchasing decisions.
MOST SIGNIFICANT RISKS
Risk: Economic downturns, inflationary pressures, and changes in end-market demand.
Impact: Could reduce sales, squeeze profit margins, and negatively affect financial performance.
Mitigating Factor: Diversified portfolio across residential, commercial, and industrial markets; focus on aftermarket services for more stable revenue.
Risk: Delays or shortages in materials and components.
Impact: May lead to production delays, increased costs, and potential loss of sales.
Mitigating Factor: Dual sourcing of critical components, localizing suppliers, and implementing digital tools to improve supply chain resilience.
Risk: Rapid changes in HVAC and building technologies, especially related to energy efficiency and sustainability.
Impact: Could make Carrier's products obsolete or less competitive if the company fails to innovate.
Mitigating Factor: Significant investment in R&D ($617 million in 2023), focus on developing sustainable and intelligent climate solutions.
CATALYSTS FOR GROWTH
I think it's important to note that the stock market overall appears significantly overvalued at the moment. This could limit upside potential or even lead to downside risk for individual stocks like Carrier, regardless of company-specific catalysts.
The recent acquisition of Viessmann's climate business gives Carrier a strong position in the fast-growing European heat pump market. If Carrier can smoothly integrate this business and realize the expected synergies, it could boost growth and profitability.
Carrier is in the process of selling its Fire & Security and Commercial Refrigeration businesses. Successfully closing these deals in 2024 as planned would streamline the company's portfolio and provide cash to pay down debt.
The North American residential HVAC market has been soft recently. Any pickup in housing activity or replacement demand could drive higher sales in this key segment for Carrier.
Disclaimer: The information provided in this newsletter is for educational and informational purposes only and does not constitute financial, investment, or legal advice. The content is solely the opinion of the author, who is not a qualified financial advisor, investment professional, or legal expert. All investments involve risk, and past performance does not guarantee future results. You should conduct your own research and consult with a qualified financial advisor before making any investment decisions. The author of this newsletter is not liable for any losses or damages arising from the use of the information provided. This newsletter is not intended for distribution to, or use by, any person in any jurisdiction where such distribution or use would be contrary to local law or regulation.
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