Carrier Global: Cooling Down From A Hot Bearish Market (NYSE:CARR)

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Carrier Transicold Reefer Sales and Service Inc. in Brampton, Ontario, Canada.

JHVEPhoto/iStock Editorial via Getty Images

Climate change is a global issue that affects everyone, and the United States is one of the countries that has supported efforts to reduce carbon emissions. Despite the fact that the US government’s efforts to reduce its carbon footprint have been slow and there is still room for improvement, it improved in the latest Climate Change Performance Index (CCPI) 2022 report, rising from 61 to 55. With President Biden’s Build Back Better Plan and the continued recovery of the global economy from the pandemic, I believe we might see a continued demand towards sustainable HVAC and refrigeration.

Carrier Global Corporation (NYSE:CARR) is well known for its leading air conditioning and heating solutions globally and is well positioned to weather out current macro headwinds such like the rising inflation. After the split from United Technologies Corp (RTX) in April 2020, CARR’s stock price increased by more than fourfold, until it was rejected near $59; since then, the price has declined by more than 38%. In the current market sentiment, CARR, which has a 0.89 beta, should be one of your options if you are looking for a low beta stock to reduce current volatility risk. The company posted an improving profitability and improved its liquidity at today’s uncertain time, making it a stock to buy at today’s level.

Company Update

CARR is operating internationally with a focus in the US which contributes 59.81% of its total revenue in Q1 2022. With the ongoing war between Russia and Ukraine, the management reassures that they don’t see a material impact on their operation. In fact, only 1% of the company’s overall revenue comes from operations in Russia, with only 1% of its total assets affected and susceptible to impairment charges.

One of the interesting technology innovations happening right now is the continued demand of intelligent or connected lifestyles. CARR is enjoying a strong growth in its HVAC product category ($2,970 million in Q1 2022, up from $2,486 million in Q1 2021) thanks to its BlueEdge service platform, an innovative and digital solution. It provides its customers improved efficiency and monitoring tools, enhancing performance. The company is also continuing to make an impact with its innovative Carrier Transicold’s Vector eCool system, which, in my opinion, will open up more opportunities in the future as the US takes the path to its decarbonization.

Another value adding catalyst is CARR’s strong capital allocation towards improving shareholder value, as quoted below:

…We continue to target $1.6 billion of share repurchases for 2022 and expect to issue $400 million of yen-denominated debt prior to the TCC acquisition. Total debt reduction for 2022 remains $750 million, consistent with what we shared with you in February at our Investor Day. Source: Q1 2022 Earnings Call

Remains Investable At Today’s Uncertainties

CARR: Company Valuation

CARR: Company Valuation (Source: Prepared by InvestOhTrader)

Looking at the company’s valuation, it is currently below my averaged fair price of $52ish. It is derived from the average of the DCF model and simple relative valuation. If the price breaks through its 52-week low of $36.23, I believe a catch between $34 to $31 will provide a huge margin of safety. As of this writing, CARR is trading at a trailing P/E ratio of 12.63x cheaper than its forward P/E of 12.35x and cheaper than its two year average of 23x. Additionally, looking at its trailing EV/EBITDA ratio of 13.50x, it is also cheaper compared to its forward EV/EBITDA ratio of 12.33x and cheaper than its 2 year average of 14x.

CARR: DCF model

CARR: DCF model (Source: Data from Seeking Alpha and Yahoo! Finance. Prepared by InvestOhTrader)

I used the expert’s forecast to project CARR’s top line. I assumed a continuing growth in its operating margin as it is enjoying operating efficiency from divesting its Chubb Fire & Security Business. I also assumed a declining effective tax rate to give way to its $2.9 billion proceeds from the said divestiture this Q1 2022. I selected WACC as my discount rate and choosing a larger discount rate such as 10% will limit its upside potential to 10%, leaving more room to the downside before unlocking a meaningful margin of safety.

Q1 2022 Performance

  • In Q1 2022, CARR reported a total revenue of $4,654 million, down from $4,699 million in the same quarter last year. Looking at its trailing total revenue amounting to $20,568 million, we can see a decrease from the $20,613 million reported last fiscal year, but still elevated above the $17,456 million reported in fiscal 2020.

  • In terms of its gross profit, the company earned $1,295.00 million in Q1 2022, down from $1,399 million in the same quarter last year. This means its gross profit is pressured by the increasing cost to make revenue. Moving forward, when looking at its gross margin, it generated a declining margin of 27.83%, compared to 29.77% recorded in Q1 2021.

  • CARR’s operating income generated a higher figure of $588 million this quarter, compared to $585 million in the same quarter last year. This resulted in an increase in operating margin to 12.63%, up from 12.45% in the same quarter last year. Additionally, this positive sentiment results in a higher bottom line of $1,379 million, up from $384 million in the same quarter last year. However, this is due to the unusual effect of $1.1 billion from its Chubb’s divestiture.

  • This increases the company’s net margin for Q1 2022 from 29.63% in the current quarter to 8.17% in the same quarter last year. Its positive bottom line growth snowballed into its Q1 2022 EPS amounting to $1.62, up when compared to its $0.44 in the same period of the previous year. Additionally, CARR generated a trailing EPS of $3.08 which is up from $1.92 in the prior fiscal year and up from $2.29 recorded in fiscal 2020.

Trading Near Its Strong Support

CARR: Weekly Chart

CARR: Weekly Chart (Source: TradingView.com)

On top of its strong performance, CARR is dropping sharply from last year’s high of $58ish. With its improving performance in today’s high inflationary environment, I believe CARR is unjustly beaten by the market. As I said before, a zone between $34ish and above $30 will provide potential investors and traders a huge margin of safety with an improving dividend yield as a bonus. As of this writing, the company posted a dividend yield of 1.58% at a very low payout ratio of 23.18%.

Key Takeaways

In addition to its improving EPS sentiment, I believe presenting a normalized figure will provide a better view for Carrier Global. In Q1 2022, it provided a normalized EPS of $0.43, still up from $0.37 recorded in the same quarter last year. Looking at the yearly figure to eliminate some seasonality, its trailing normalized EPS totaled to $1.82, up from $1.77 recorded last fiscal year and up from $1.40 recorded in fiscal 2020. I believe this is a strong catalyst and is why bears should tone down.

On a risk note, further analysis found a lower trailing FCF of $1,504 million this quarter compared to $1,893 million in the previous fiscal year, resulting in a lower FCF margin of 7.31% compared to 9.18% in the prior fiscal year. This is due to a combination of a lower trailing cash from operations compared to the prior fiscal year and a higher CAPEX of $347 million compared to $344 million last fiscal year.

On the brighter side, CARR maintains a liquid balance sheet with an improving current ratio of 1.74x compared to its previous fiscal year of 1.72x and a balance sheet cash position of $3.6 billion. Additionally, looking at its debt to EBITDA ratio of 3.12x, which improved from 3.56x previous fiscal year and continued an improving trend compared to its 4.55x recorded in fiscal 2020, we can see the company’s liquidity improved in today’s uncertain market. This is especially true when looking at its improving debt to equity ratio of 1.27x compared to its 2-year average of 1.65x.

Considering the present management deleveraging approach, the company was able to reduce its trailing total debt from $9,052 million which resulted in a lower trailing interest expense of $310 million, down from $319.00 recorded in fiscal 2021. I believe that CARR is still liquid as of this writing due to its increasing cash flow and will continue to provide a positive bottom line with a potential ease on its interest expenses.

CARR is a buy in today’s gloomy market, and I believe that carefully accumulating a stake during these uncertain times will result in a long-term price appreciation and dividend income growth.

Thank you for reading and stay safe everyone!



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