Company Reports

Carrier Global, a leading supplier of heating, ventilation, air-conditioning, and refrigeration products and related services, was spun off from United Technologies in April 2020. Since then, the firm has undergone a substantial transformation. Over the years following the spinoff, Carrier's management focused on strengthening the firm's balance sheet and organic reinvestment. Notably, the company sold its Chubb fire and security services business and its ownership stake in the Beijer joint venture to raise capital to pay down debt. Carrier also increased spending on research and development, its sales organization, and capital projects to support product development and growth initiatives.

Carrier's first-quarter revenue popped 17% year over year, but most of that growth was from the Viessmann acquisition, which closed on Jan. 2. Organic revenue grew a much more muted 2%, driven by 2% organic growth from the HVAC segment, 7% organic growth from the fire and security segment, partially offset by a negative 2% organic revenue decline from the refrigeration segment. Acquisition and divestiture-related costs weighed heavily on GAAP operating margin, which declined 240 basis points to 8.1%. However, excluding nonrecurring charges, adjusted operating margin expanded 280 basis points to 15%.

Carrier Global, a leading supplier of heating, ventilation, air-conditioning, and refrigeration products and related services, was spun off from United Technologies in April 2020. Since then, the firm has undergone a substantial transformation. Over the years following the spinoff, Carrier's management focused on strengthening the firm's balance sheet and organic reinvestment. Notably, the company sold its Chubb fire and security services business and its ownership stake in the Beijer joint venture to raise capital to pay down debt. Carrier also increased spending on research and development, its sales organization, and capital projects to support product development and growth initiatives.

New single-family home sales increased 4% in 2023 to 666,000 units, as homebuilders capitalized on a dearth of existing for-sale inventory while also offering more sales incentives, cutting base home prices, and building smaller homes to improve affordability. By the fourth quarter of 2023, homebuilders began to pull back on sales incentives as the average 30-year fixed mortgage rate retreated from 7.62% in October 2023 to 6.64% in January 2024. However, mortgage rates have trended higher recently, and we now forecast the average 30-year fixed rate will be 6.50% in 2024, up from our previous forecast of 6.10%. Even so, that’s lower than the 2023 average of 6.81%, and we think homebuilders won’t hesitate to increase sales incentives if needed; they still enjoyed above-average gross profit margins last year with elevated incentives. As such, in 2024, we think new-home sales will increase 9% to 730,000 units and single-family housing starts will increase 4% to 985,000 units. However, we expect total housing starts will decline roughly 5% to 1,345,000 units due to a 23% decline in multifamily starts to 360,000 units, as there’s currently approximately 1,000,000 multifamily units under construction—the largest backlog in at least 50 years.

Overall, Carrier delivered a solid fourth-quarter performance, although there were puts and takes. Flat year-over-year organic revenue growth during the quarter fell short of our expectations as continued distributor inventory destocking of residential heating, ventilation, and air-conditioning systems more than offset strong demand for light commercial and larger commercial HVAC equipment and services. And despite HVAC segment revenue declining 1% year over year, the segment delivered notable adjusted operating margin expansion that propelled consolidated margin higher by 80 basis points to 10.9%.

After the Dec. 13 market close, narrow-moat-rated Carrier Global announced it has agreed to sell its commercial refrigeration business to long-term joint venture partner Haier for a total enterprise value of $775 million, including Haier’s assumption of approximately $200 million of net pension liabilities. Carrier disclosed that the commercial refrigeration deal enterprise value equates to 16.5 times the business’ expected 2023 EBITDA. Carrier will retain its transportation refrigeration, Sensitech, and Lynx cold chain businesses.

Carrier Global, a leading supplier of climate control and fire and security solutions, was spun off from United Technologies in April 2020. In our view, Carrier is a high-quality franchise with leading brands across most of its product portfolio.

New-home sales have rebounded since the spring of this year as sales incentives and price reductions have attracted buyers who have fewer options in the supply-constrained existing-home market. That said, homebuilder sentiment data tells us that smaller builders remain cautious. Even so, we forecast single-family starts to increase by 3% in 2024, to 0.92 million units. However, we project this increase in single-family starts will be more than offset by a 24% decline in multifamily starts, to 0.36 million units. Multifamily construction has been robust for the past three years, but a record construction backlog and higher construction and financing costs have tamed developers' appetite for new multifamily projects.

Narrow-moat-rated Carrier is in the midst of a major portfolio transformation. It expects to complete its EUR 12 billion acquisition of Viessmann, a large player in the European heat pump and boiler market, in early January, and the firm will also divest its security, commercial refrigeration, and fire businesses. On Dec. 8, Carrier announced that it has reached an agreement with Honeywell to sell its security business for $4.95 billion, or 17 times adjusted 2023 EBITDA. This business consists of three brands: LenelS2 (commercial and enterprise access solutions), Onity (electronic locks with significant hospitality market presence), and Supra (real estate lock boxes). Together, we estimate these businesses generate approximately $1 billion of sales with an EBITDA margin in the high-20% range. We think Carrier received a favorable price for these assets, and we’ve raised our fair value estimate 2% to $50 per share after incorporating the security sale into our valuation model. We’re also now incorporating the Viessmann acquisition into our explicit financial forecast. We continue to view the acquisition as roughly value neutral based on our current growth and profitability outlook for the business.

Carrier Global, a leading supplier of climate control and fire and security solutions, was spun off from United Technologies in April 2020. In our view, Carrier is a high-quality franchise with leading brands across most of its product portfolio.

Carrier Global, a leading supplier of climate control and fire and security solutions, was spun off from United Technologies in April 2020. In our view, Carrier is a high-quality franchise with leading brands across most of its product portfolio.

After reviewing Carrier’s third-quarter financial results, we’ve maintained our $49 per share fair value estimate. The narrow-moat-rated manufacturer of heating, ventilation, and air conditioning, refrigeration, and fire and security products reported good results. Reported revenue increased 5% year over year (3% organic) to $5.7 billion, adjusted operating margin expanded 240 basis points to 18.2%, and free cash flow increased 36% to $949 million.

New-home sales have remained resilient despite worsening housing affordability in recent months amid rising mortgage rates, with little relief in home prices in most markets. Year-to-date new-home sales through July were about even with the year-ago period, compared with a 22% decline in existing-home sales. The key to homebuilders’ relative success this year has been their ability to improve affordability by offering sales incentives, lowering base prices, and building smaller homes. According to the National Association of Home Builders, the share of builders offering incentives was 55% in August, up from 52% in July but down from 62% last year. One fourth of homebuilders reported lowering base prices by 6% on average. Homebuilders have also boosted production of speculative homes to capitalize on the tight supply of existing for-sale homes. Spec building also helps builders better manage construction cycle times and costs.

Narrow-moat-rated Carrier Global continues to capitalize on robust commercial HVAC demand. Indeed, in the second quarter, light commercial HVAC sales increased 60% year over year and commercial sales increased by a high-teens percentage. The company continues to make progress on increasing higher-margin aftermarket sales as well, and HVAC aftermarket revenue (along with controls) grew by a double-digit percentage. However, residential HVAC sales declined by a mid-single-digit percentage, in line with our expectations, as demand normalizes from peak levels seen during the pandemic. Overall, the HVAC segment reported 9% organic revenue growth and adjusted operating margin expanded 70 basis points to 18.8%, despite margin dilution from the Toshiba Carrier deal.

Carrier Global, a leading supplier of climate control and fire and security solutions, was spun off from United Technologies in April 2020. In our view, Carrier is a high-quality franchise with leading brands across most of its product portfolio.

Through the first four months of 2023 (typically viewed as the “spring selling season” for homebuilders) new home sales significantly outperformed existing home sales. Indeed, April year-to-date new home sales declined roughly 10% year over year compared to over a 26% decline for existing home sales. New home sales improved sequentially during the first four months of the year, and April sales increased 11% year over year, albeit on an easy prior-year comparison (April 2022 new sales were down 24% year over year).

Carrier Global, a leading supplier of climate control and fire and security solutions, was spun off from United Technologies in April 2020. In our view, Carrier is a high-quality franchise with leading brands across most of its product portfolio.

We don't expect to materially change our $48 per share fair value estimate for shares of Carrier following its first-quarter earnings release (save, for perhaps, a time value of money adjustment). As noted in our other April 26 analyst note on the announced Viessmann acquisition, we also don't expect an immediate fair value adjustment related to the announced deal. We see a pathway for the Viessmann transaction to at least be valuation neutral, but, in our view, there is little room for error. We're giving narrow-moat Carrier the benefit of the doubt for now, although we may revisit our valuation assumptions as we learn more about the business.

After the April 25 market close, Carrier Global confirmed that it will acquire Germany-based Viessmann Climate Solutions and divest most of its fire and security and commercial refrigeration businesses. The Wall Street Journal’s April 24 report of the imminent Viessmann acquisition sent Carrier’s stock 7% lower that day as the market was likely uncomfortable with the deal’s size (EUR 12 billion), valuation (17 times 2023 EBITDA excluding synergies), and timing (ahead of a potential recession).

The Wall Street Journal reported on April 11 that Carrier is considering selling or spinning off its fire and security segment. That said, it noted that this business review is in the early stages and there is no guarantee the company will follow through with such a transaction. We are maintaining our narrow moat rating and $48 per share fair value estimate for Carrier. We would not expect to make a transaction-related fair value adjustment until either a sale agreement (with a purchase price) is announced or upon completion of a spinoff transaction. If management decides to move forward with a divestiture, it wouldn’t likely close until 2024, in our view.