Carrier Earnings: 2023 Guidance Maintained; Acquisition and Divestiture Announcements Take Center Stage

We don’t expect to materially change our $48 per share fair value estimate for shares of Carrier CARR following its first-quarter earnings release (save, for perhaps, a time value of money adjustment). We also don’t expect an immediate fair value adjustment related to the announced Viessmann acquisition. 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.

Carrier’s first-quarter reported revenue grew 13% year over year to $5.3 billion, driven by 4% organic growth, 11 percentage points of growth tied to the Toshiba Carrier Corporation acquisition, offset by a 2-percentage point drag from foreign-currency translation. Organic growth was primarily driven by continued strength from the commercial heating, ventilation, and air-conditioning market, strong growth from commercial fire and access solutions, and 30% sales growth from global truck and trailer refrigeration. Adjusted operating margin fell 190 basis points year over year to 12.2% as favorable price/cost was more than offset by the unfavorable effect of stagnant volumes, product mix, and investment spending.

Management maintained its full-year 2023 guidance, which sees $22 billion of revenue (low- to mid-single-digit organic growth), about a 14% adjusted operating margin, adjusted EPS of $2.50-$2.60, and $1.9 billion of free cash flow.

Carrier plans to divest roughly 90% of its fire and security business (it is keeping UTEC controls) and over 90% of its commercial refrigeration business (it is keeping mechanical systems). We think these divestitures will be needed to rightsize Carrier’s balance sheet after the Viessmann acquisition.