Carrier Earnings: Strong Commercial HVAC Demand Continues; Divestitures Moving Forward This Year

Narrow-moat-rated Carrier Global CARR 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.

2023 will be a transformative year for Carrier as management expects to close on the Viessmann acquisition by year-end and have its commercial refrigeration, security, and industrial fire businesses on the market within the next couple of months. The residential and commercial fire businesses will likely be on the selling block thereafter, although it sounds like management could be open to other types of divestiture transactions (like a spinoff) for these two businesses. Proceeds from these divestitures should help Carrier’s leverage ratio return to more normalized levels in the wake of the Viessmann deal.

Fire and security had a solid quarter with 9% year-over-year organic sales growth, but adjusted operating margin slipped 50 basis points to 14.7%. In the refrigeration segment, lower container and commercial refrigeration sales masked strong transportation refrigeration revenue, which was up by a double-digit percentage. Refrigeration organic revenue fell 6%, and adjusted operating margin compressed 240 basis points to 12.2%.

We’ve increased our fair value estimate by about 4% to $49 per share due to stronger near-term sales growth and profit margins from the HVAC segment.