Carrier: Not Too Hot Yet

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Carrier: Not Too Hot Yet

seekingalpha04-27

Carrier Global Corp. is on track to complete its transformation into a pure-play HVAC company this year, selling off non-core businesses.Despite short-term headwinds in some residential markets, ...

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(NYSE:NYSE:CARR) in December 2023, the company's plans to transform into a pure-play HVAC company were in place, but the exact timing and details were a bit uncertain. Since then, the company closed its purchase of German premium heat pump and home solar generation system manufacturer Viessman Climate Solutions. Also, sales were announced for businesses in Security, Commercial Refrigeration, and Industrial Fire. These sales are expected to close just after mid-year. The only piece left to sell is Residential and Commercial Fire, and Carrier expects to start marketing the business in the next few weeks for a sale by the end of the year. Carrier The intent of this reshuffle is to offload some healthy but slow-growing businesses and focus on HVAC, with its secular growth trends in electrification, indoor air quality, and data center cooling. Carrier should therefore receive a richer valuation like other pure-play HVAC companies. While Carrier stock is now trading close to an all-time high, it still underperformed relative to its domestic peers since my last article. Japanese firm Daikin (OTCPK:DKILY) (OTCPK:DKILF) did even worse, although it has headwinds from weaker yen results when translated into dollars and weak Asian business environment and market share loss. Data by YCharts Viessmann is underperforming this year compared to initial expectations, but this was due to some temporary uncertainty around government incentives for heat pumps, as well as lower demand for solar installations. With more clarity on the subsidies in Europe, business should pick up in the second half of the year. The residential market has been weak worldwide, but North America looks ready to turn up again. Commercial HVAC is another source of strength. Looking forward, Carrier has an opportunity to globally apply the best technologies and operations from the several regional HVAC businesses it has acquired - Toshiba, Giwee, and Viessmann. This will create cost synergies and margin expansion as well as revenue synergies by selling the best products outside of their original regions. Carrier still looks cheaper than its pure-play HVAC peers and remains a Buy even near all-time highs. Viessmann And Other Residential HVAC Viessmann's first year as a part of Carrier is off to a tough start. Sales in Q1 were down 12%, although more than half of this decline was in the lower-margin solar panel business. As I mentioned in December, suspension of some environmental subsidies in Germany caused consumers to step back from heat pump purchases this year. Germany has since updated their program, along with many other European countries. As discussed on the earnings call, Viessmann is also rolling out larger units than what they have historically sold, which will enable them to sell into small multifamily residential buildings. This would be a new market for Viessmann. Carrier is on track to deliver $75 million of cost synergies with Viessmann this year, on the way to $200 million in 2026.  North American residential HVAC sales were down mid-single digits, with a slowdown in the housing market. This appears to be turning, as Carrier is seeing new orders up slightly this year. Some of this is due to the desire of distributors to buy units that use R-410A refrigerant before it is phased out and the more expensive R-454B refrigerant is required.  Commercial HVAC Commercial HVAC has been a strong point for Carrier, with double digit growth. Schools and health care continue to pursue upgrades with the need to improve indoor air quality. Data Centers were another market vertical mentioned by Carrier in the presentation. They see the addressable market for HVAC in data centers more than doubling in the next 4 years. Finally, aftermarket business remains a focus for Carrier. Nearly half the chillers sold are under a long-term maintenance agreement, and a majority of these are digitally connected, using apps to allow for remote monitoring and control.  Financial Update At first glance, Carrier's guidance update looked concerning, but nearly all of the changes are due to an earlier sale of the Industrial Fire business. Sales have been revised lower by $500 million to $26 billion. This is partially due to lower sales at Viessmann and the rest is due to the Industrial Fire divestment. The good news is that Carrier is able to control costs, resulting in the margin forecast moving to the top of its previous range. This leaves the EPS estimate unchanged. Free cash flow this year, already low at $700 million, was revised down to $400 million, but this was due to additional taxes on the gain from the Industrial Fire divestment being paid this year. Carrier Carrier currently has a high level of debt following the Viessmann acquisition, but the company now has a clear path to pay down most of this with divestment proceeds. Management stated that they now expect to reach net debt/EBITDA leverage of 2 by the end of 2024, which would enable the company to resume share buybacks. Carrier would like to at least buy back the shares issued in the Viessmann deal.  To verify this, I translated the $2.85 EPS guidance into EBITDA, and I get $5.1 billion based on the following calculation: Author Spreadsheet Carrier ended Q1 with $15.6 billion of net debt. They expect to receive $7.2 billion of divestment proceeds this year, or $5.5 billion after tax. Free cash flow minus dividends for the rest of the year comes out to a small cash draw. Putting all this together, I project net debt of $10.1 billion at the end of 2024.   Author Spreadsheet As we see from the calculation, ND/EBITDA comes out just under 2 at the end of the year. With the desire to pay down debt this year and start buying back stock from the Viessmann deal next year, I would not expect much in the way of dividend increases until 2026. The company continues to believe underlying free cash flow, after all the M&A noise, to be around $2.4 billion. Buying back the stock issued in the Viessmann acquisition would cost around $3.5 billion, so after accounting for dividends at their current levels, it should take about 2 years to complete the buybacks. After that, the company will have the capability to increase dividends above the current yield around 1.3%. Valuation On a trailing EV/EBITDA basis, Carrier is valued similarly to Lennox (LII), but both are cheaper than Trane (TT). These are both pure HVAC companies, as Carrier will be after its transformation. Johnson Controls (JCI) is valued more cheaply, but it also contains many of the lower-growth businesses similar to the ones Carrier is selling. Daikin has the typical lower valuation of most Japanese companies but also operates in markets that are currently lower-growth. Seeking Alpha Using forward EBITDA estimates, the company looks even cheaper. Here are the forward EV/EBITDA multiples and EBITDA growth estimates from the Seeking Alpha peer comparison page.   Author Spreadsheet As I noted above, Carrier as a pure-play HVAC company should receive a valuation similar to Trane or Lennox. As Carrier sheds the slower growing businesses this year, I expect the market to value it closer to these companies. To be a bit more conservative considering Carrier's first year as a pure-play HVAC company a number at the low end of this range would be appropriate. A fair EV/EBITDA multiple for Carrier would be around 18 on that basis. Using my EBITDA estimate from earlier in the article of $4.92 billion excluding Refrigeration and Fire & Security, a fair enterprise value for Carrier would be $4.92 * 18 = $88.56 billion. If we subtract the expected $10.14 billion of net debt at year-end 2024 from this enterprise value, we get a fair market cap of $78.42 billion. Dividing by the share count of 915 million shares, we arrive at a price target of $85.70. Risks The biggest risk for Carrier is any slowdown or reversal in the trend toward electrification of HVAC and demand for heat pumps, especially in Europe. As we are seeing in Viessmann's Q1 results, even a little uncertainty in government support of heat pumps can result in consumers stepping away from the market. While the integration of Viessmann appears to be progressing well, cross-marketing their products into other regions of the world is so far untested and customers outside of Europe may not be interested in Viessmann's premium products.  Within the US, there is risk that demand for systems that use R-410A refrigerant before it is phased out could just pull forward demand from next year, resulting in a sales slowdown in 2025.  Finally, an economic downturn in certain risky real estate segments such as the Chinese residential market or commercial office buildings globally would create temporary headwinds for Carrier. Conclusion Carrier share price is near all-time highs following a good Q1 2024 earnings release. Still, the company is cheap relative to its US based pure play HVAC peers. Shares would have about 50% upside if valued similarly to Lennox and Trane on forward EV/EBITDA. I do not think this valuation will be achieved quickly. Carrier will have to demonstrate that it can achieve similar growth rates in its first year as a pure-play HVAC company.   There are some temporary headwinds, especially in Europe, that could put this growth at risk. In the long term, however, electrification of HVAC and the predominance of heat pumps seems likely. Carrier has just begun to find cost synergies from the Viessman merger. Revenue synergy opportunities also exist, bringing the best products from Toshiba in Japan, Giwee in China, and Viessman in Germany to the rest of the world. Adding in secular growth opportunities like data centers, aftermarket growth, and digital monitoring and control apps, Carrier has the growth runway to make it more than just a cyclical industrial company. The market has begun to price this in but the shares are not overheated yet.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":0},"commentList":[{"id":304260422693072,"gmtCreate":1715303874096,"gmtModify":1715303877419,"author":{"id":"3555410704651395","authorId":"3555410704651395","name":"PuntersStock","avatar":"https://static.tigerbbs.com/e16a93d22bcde690b8924233132c4563","vip":1,"hat":"https://static.tigerbbs.com/0a8758340a08196056f8bc1e54805193","crmLevel":9,"crmLevelSwitch":1,"idStr":"3555410704651395","authorIdStr":"3555410704651395"},"htmlText":"‌<a href=\"\">[微笑]&nbsp;</a>‌","listText":"‌<a href=\"\">[微笑]&nbsp;</a>‌","text":"‌[微笑] ‌","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":0,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/304260422693072","repostId":2430745610,"repostType":2,"repost":{"id":"2430745610","kind":"highlight","pubTimestamp":1714227293,"share":"https://ttm.financial/m/news/2430745610?lang=&edition=fundamental","pubTime":"2024-04-27 22:14","market":"hk","language":"en","title":"Carrier: Not Too Hot Yet","url":"https://stock-news.laohu8.com/highlight/detail?id=2430745610","media":"seekingalpha","summary":"Carrier Global Corp. is on track to complete its transformation into a pure-play HVAC company this year, selling off non-core businesses.Despite short-term headwinds in some residential markets, secul","content":"<html><body><ul><li>Carrier Global Corp. is on track to complete its transformation into a pure-play HVAC company this year, selling off non-core businesses.</li><li>Despite short-term headwinds in some residential markets, secular growth opportunities exist in electrification, data center cooling, and aftermarket service.</li><li>Carrier is still valued below HVAC-focused companies like Lennox and Trane, so the shares appear to have upside despite trading near all-time highs.</li></ul><p><figure><picture> <img fetchpriority=\"high\" height=\"896px\" sizes=\"(max-width: 768px) calc(100vw - 36px), (max-width: 1024px) calc(100vw - 132px), (max-width: 1200px) calc(66.6vw - 72px), 600px\" src=\"https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1718507948/image_1718507948.jpg?io=getty-c-w750\" srcset=\"https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1718507948/image_1718507948.jpg?io=getty-c-w1536 1536w, https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1718507948/image_1718507948.jpg?io=getty-c-w1280 1280w, https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1718507948/image_1718507948.jpg?io=getty-c-w1080 1080w, https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1718507948/image_1718507948.jpg?io=getty-c-w750 750w, https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1718507948/image_1718507948.jpg?io=getty-c-w640 640w, https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1718507948/image_1718507948.jpg?io=getty-c-w480 480w, https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1718507948/image_1718507948.jpg?io=getty-c-w320 320w, https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1718507948/image_1718507948.jpg?io=getty-c-w240 240w\" width=\"1536px\"/> </picture><figcaption> <p>vchal/iStock via Getty Images</p></figcaption></figure></p> <h2>Transformation Is Underway</h2> <p>The last time I wrote about Carrier Global Corp. (NYSE:<span>NYSE:CARR</span>) in December 2023, the company's plans to transform into a pure-play HVAC company were in place, but the exact timing and<span> details were a bit uncertain. Since then, the company closed its purchase of German premium heat pump and home solar generation system manufacturer Viessman Climate Solutions. Also, sales were announced for businesses in </span>Security<span>, </span>Commercial Refrigeration<span>, and </span>Industrial Fire<span>. These sales are expected to close just after mid-year. The only piece left to sell is Residential and Commercial Fire, and Carrier expects to start marketing the business in the next few weeks for a sale by the end of the year.</span></p> <p><figure contenteditable=\"false\"><span><img contenteditable=\"false\" height=\"358\" loading=\"lazy\" src=\"https://static.seekingalpha.com/uploads/2024/4/25/21205541-17140675236383643.png\" width=\"640\"/></span><figcaption><p><span>Carrier</span></p></figcaption></figure></p> <p>The intent of this reshuffle is to offload some healthy but slow-growing businesses and focus on HVAC, with its secular<span> growth trends in electrification, indoor air quality, and data center cooling. Carrier should therefore receive a richer valuation like other pure-play HVAC companies. While Carrier stock is now trading close to an all-time high, it still underperformed relative to its domestic peers since my last article. Japanese firm Daikin (</span>OTCPK:DKILY<span>) (</span>OTCPK:DKILF<span>) did even worse, although it has </span>headwinds<span> from weaker yen results when translated into dollars and weak Asian business environment and market share loss.</span></p> <p><figure><img height=\"366\" loading=\"lazy\" src=\"https://static.seekingalpha.com/uploads/2024/4/25/saupload_35ed29c921f2f5ee7aa981e8acbc5a6f.png\" width=\"635\"/><figcaption>Data by YCharts</figcaption></figure></p> <p>Viessmann is underperforming this year compared to initial expectations, but this was due to some temporary uncertainty around government incentives for heat pumps, as well as lower demand for solar installations. With more clarity on the subsidies in Europe, business should pick up in the second half of the year. The residential market has been weak worldwide, but North America looks ready to turn up again. Commercial HVAC is another source of strength. Looking forward, Carrier has an opportunity to globally apply the best technologies and operations from the several regional HVAC businesses it has acquired - Toshiba, Giwee, and Viessmann. This will create cost synergies and margin expansion as well as revenue synergies by selling the best products outside of their original regions. Carrier still looks cheaper than its pure-play HVAC peers and remains a Buy even near all-time highs.</p> <h2>Viessmann And Other Residential HVAC</h2> <p>Viessmann's first year as a part of Carrier is off to a tough start. Sales in Q1 were down 12%, although more than half of this decline was in the lower-margin solar panel business. As I mentioned in December, suspension of some environmental subsidies in Germany caused consumers to step back from heat pump purchases this year. Germany has since updated their program, along with many other European countries. As discussed on the earnings call, Viessmann is also rolling out larger units than what they have historically sold, which will enable them to sell into small multifamily residential buildings. This would be a new market for Viessmann. Carrier is on track to deliver $75 million of cost synergies with Viessmann this year, on the way to $200 million in 2026. </p> <p>North American residential HVAC sales were down mid-single digits, with a slowdown in the housing market. This appears to be turning, as Carrier is seeing new orders up slightly this year. Some of this is due to the desire of distributors to buy units that use R-410A refrigerant before it is phased out and the more expensive R-454B refrigerant is required. </p> <h2>Commercial HVAC</h2> <p>Commercial HVAC has been a strong point for Carrier, with double digit growth. Schools and health care continue to pursue upgrades with the need to improve indoor air quality. Data Centers were another market vertical mentioned by Carrier in the presentation. They see the addressable market for HVAC in data centers more than doubling in the next 4 years. Finally, aftermarket business remains a focus for Carrier. Nearly half the chillers sold are under a long-term maintenance agreement, and a majority of these are digitally connected, using apps to allow for remote monitoring and control. </p> <h2>Financial Update</h2> <p>At first glance, Carrier's guidance update looked concerning, but nearly all of the changes are due to an earlier sale of the Industrial Fire business. Sales have been revised lower by $500 million to $26 billion. This is partially due to lower sales at Viessmann and the rest is due to the Industrial Fire divestment. The good news is that Carrier is able to control costs, resulting in the margin forecast moving to the top of its previous range. This leaves the EPS estimate unchanged. Free cash flow this year, already low at $700 million, was revised down to $400 million, but this was due to additional taxes on the gain from the Industrial Fire divestment being paid this year.</p> <p><figure contenteditable=\"false\"><span><img contenteditable=\"false\" height=\"360\" loading=\"lazy\" src=\"https://static.seekingalpha.com/uploads/2024/4/25/21205541-17140733409319563.png\" width=\"640\"/></span><figcaption><p><span>Carrier</span></p></figcaption></figure></p> <p>Carrier currently has a high level of debt following the Viessmann acquisition, but the company now has a clear path to pay down most of this with divestment proceeds. Management stated that they now expect to reach net debt/EBITDA leverage of 2 by the end of 2024, which would enable the company to resume share buybacks. Carrier would like to at least buy back the shares issued in the Viessmann deal. </p> <p>To verify this, I translated the $2.85 EPS guidance into EBITDA, and I get $5.1 billion based on the following calculation:</p> <p><figure contenteditable=\"false\"><span><img contenteditable=\"false\" height=\"278\" loading=\"lazy\" src=\"https://static.seekingalpha.com/uploads/2024/4/25/21205541-17140738660359623.png\" width=\"640\"/></span><figcaption><p><span>Author Spreadsheet</span></p></figcaption></figure></p> <p>Carrier ended Q1 with $15.6 billion of net debt. They expect to receive $7.2 billion of divestment proceeds this year, or $5.5 billion after tax. Free cash flow minus dividends for the rest of the year comes out to a small cash draw. Putting all this together, I project net debt of $10.1 billion at the end of 2024.</p> <p><figure contenteditable=\"false\"><picture> <img contenteditable=\"false\" height=\"262\" loading=\"lazy\" src=\"https://static.seekingalpha.com/uploads/2024/4/25/21205541-17140740964129379.png\" width=\"421\"/> </picture><figcaption><p><span>Author Spreadsheet</span></p></figcaption></figure></p> <p>As we see from the calculation, ND/EBITDA comes out just under 2 at the end of the year. With the desire to pay down debt this year and start buying back stock from the Viessmann deal next year, I would not expect much in the way of dividend increases until 2026. The company continues to believe underlying free cash flow, after all the M&amp;A noise, to be around $2.4 billion. Buying back the stock issued in the Viessmann acquisition would cost around $3.5 billion, so after accounting for dividends at their current levels, it should take about 2 years to complete the buybacks. After that, the company will have the capability to increase dividends above the current yield around 1.3%.</p> <h2>Valuation</h2> <p>On a trailing EV/EBITDA basis, Carrier is valued similarly to Lennox (LII), but both are cheaper than Trane (TT). These are both pure HVAC companies, as Carrier will be after its transformation. Johnson Controls (JCI) is valued more cheaply, but it also contains many of the lower-growth businesses similar to the ones Carrier is selling. Daikin has the typical lower valuation of most Japanese companies but also operates in markets that are currently lower-growth.</p> <p><figure contenteditable=\"false\"><span><img contenteditable=\"false\" loading=\"lazy\" src=\"https://static.seekingalpha.com/uploads/2024/4/25/21205541-17140750919128888.png\"/></span><figcaption><p><span>Seeking Alpha</span></p></figcaption></figure></p> <p>Using forward EBITDA estimates, the company looks even cheaper. Here are the forward EV/EBITDA multiples and EBITDA growth estimates from the Seeking Alpha peer comparison page.</p> <p><figure contenteditable=\"false\"><picture> <span><img contenteditable=\"false\" height=\"59\" loading=\"lazy\" src=\"https://static.seekingalpha.com/uploads/2024/4/26/21205541-17141691181093352.png\" width=\"640\"/></span> </picture><figcaption><p><span>Author Spreadsheet</span></p></figcaption></figure></p> <p>As I noted above, Carrier as a pure-play HVAC company should receive a valuation similar to Trane or Lennox. As Carrier sheds the slower growing businesses this year, I expect the market to value it closer to these companies. To be a bit more conservative considering Carrier's first year as a pure-play HVAC company a number at the low end of this range would be appropriate. A fair EV/EBITDA multiple for Carrier would be around 18 on that basis.</p> <p>Using my EBITDA estimate from earlier in the article of $4.92 billion excluding Refrigeration and Fire &amp; Security, a fair enterprise value for Carrier would be $4.92 * 18 = $88.56 billion.</p> <p>If we subtract the expected $10.14 billion of net debt at year-end 2024 from this enterprise value, we get a fair market cap of $78.42 billion. Dividing by the share count of 915 million shares, we arrive at a price target of $85.70.</p> <h2>Risks</h2> <p>The biggest risk for Carrier is any slowdown or reversal in the trend toward electrification of HVAC and demand for heat pumps, especially in Europe. As we are seeing in Viessmann's Q1 results, even a little uncertainty in government support of heat pumps can result in consumers stepping away from the market.</p> <p>While the integration of Viessmann appears to be progressing well, cross-marketing their products into other regions of the world is so far untested and customers outside of Europe may not be interested in Viessmann's premium products. </p> <p>Within the US, there is risk that demand for systems that use R-410A refrigerant before it is phased out could just pull forward demand from next year, resulting in a sales slowdown in 2025. </p> <p>Finally, an economic downturn in certain risky real estate segments such as the Chinese residential market or commercial office buildings globally would create temporary headwinds for Carrier.</p> <h2>Conclusion</h2> <p>Carrier share price is near all-time highs following a good Q1 2024 earnings release. Still, the company is cheap relative to its US based pure play HVAC peers. Shares would have about 50% upside if valued similarly to Lennox and Trane on forward EV/EBITDA. I do not think this valuation will be achieved quickly. Carrier will have to demonstrate that it can achieve similar growth rates in its first year as a pure-play HVAC company. </p> <div></div> <p>There are some temporary headwinds, especially in Europe, that could put this growth at risk. In the long term, however, electrification of HVAC and the predominance of heat pumps seems likely. Carrier has just begun to find cost synergies from the Viessman merger. Revenue synergy opportunities also exist, bringing the best products from Toshiba in Japan, Giwee in China, and Viessman in Germany to the rest of the world. Adding in secular growth opportunities like data centers, aftermarket growth, and digital monitoring and control apps, Carrier has the growth runway to make it more than just a cyclical industrial company. The market has begun to price this in but the shares are not overheated yet.</p></body></html>","source":"seekingalpha","collect":0,"html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>Carrier: Not Too Hot Yet</title>\n<style type=\"text/css\">\na,abbr,acronym,address,applet,article,aside,audio,b,big,blockquote,body,canvas,caption,center,cite,code,dd,del,details,dfn,div,dl,dt,\nem,embed,fieldset,figcaption,figure,footer,form,h1,h2,h3,h4,h5,h6,header,hgroup,html,i,iframe,img,ins,kbd,label,legend,li,mark,menu,nav,\nobject,ol,output,p,pre,q,ruby,s,samp,section,small,span,strike,strong,sub,summary,sup,table,tbody,td,tfoot,th,thead,time,tr,tt,u,ul,var,video{ font:inherit;margin:0;padding:0;vertical-align:baseline;border:0 }\nbody{ font-size:16px; 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}\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nCarrier: Not Too Hot Yet\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-04-27 22:14 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4687010-carrier-not-too-hot-yet><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>Carrier Global Corp. is on track to complete its transformation into a pure-play HVAC company this year, selling off non-core businesses.Despite short-term headwinds in some residential markets, ...</p>\n\n<a href=\"https://seekingalpha.com/article/4687010-carrier-not-too-hot-yet\">Web Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","type":0,"thumbnail":"https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1718507948/image_1718507948.jpg","relate_stocks":{"BK4086":"建筑产品","LU1989764664.SGD":"CPR Invest - Global Disruptive Opportunities A2 Acc SGD-H","CARR":"开利全球","BK4504":"桥水持仓","LU1989764748.USD":"东方汇理环球颠覆性机遇A2 Acc","LU1854104046.USD":"M&G (LUX) POSITIVE IMPACT \"A\" (USD) ACC","IE00B19Z9P08.USD":"LEGG MASON CLEARBRIDGE US AGGRESSIVE GROWTH \"A\" (USD) INC","BK4580":"工业 4.0","JCI":"江森自控","LU0124384867.USD":"贝莱德新能源基金A2","IE00BZ1G4Q59.USD":"LEGG MASON CLEARBRIDGE US EQUITY SUSTAINABILITY LEADER \"A\"(USD) INC (A)","IE00B19Z9Z06.USD":"Legg Mason ClearBridge - US Aggressive Growth A Acc USD","LU0320765489.SGD":"FTIF - Franklin Mutual US Value A Acc SGD","LU2211817866.USD":"Allianz Food Security AT Acc USD","LU0070302665.USD":"FRANKLIN MUTUAL U.S. VALUE \"A\" (USD) ACC","DKILY":"Daikin Industries Ltd.","DKILF":"Daikin Industries Ltd.","LU2133065610.SGD":"JPMorgan Investment Funds - Global Dividend A (mth) SGD","TT":"Trane技术","LU2552382215.SGD":"WELLINGTON US BRAND POWER \"A\" (SGDHDG) ACC","BK4585":"ETF&股票定投概念","LU2552382058.USD":"WELLINGTON US BRAND POWER \"A\" (USD) ACC","LII":"雷诺士","IE00BKVL7J92.USD":"Legg Mason ClearBridge - US Equity Sustainability Leaders A Acc USD","LU2552382132.HKD":"WELLINGTON US BRAND POWER \"A\" (HKD) ACC","BK4533":"AQR资本管理(全球第二大对冲基金)","LU1978683503.SGD":"Blackrock Sustainable Energy A2 SGD-H","BK4566":"资本集团","NYSE":"纽交所","LU0211331839.USD":"FRANKLIN MUTUAL GLB DISCOVERY \"A\" (USD) ACC","LU0323240290.USD":"HSBC GIF GLOBAL EQUITY CLIMATE CHANGE \"AD\" INC","LU1854103824.USD":"M&G (LUX) POSITIVE IMPACT \"A\" (USD) INC","IE00B894F039.SGD":"Legg Mason ClearBridge - US Aggressive Growth A Acc SGD-H","BK4588":"碎股","LU0312595415.SGD":"Schroder ISF Global Climate Change Equity A Acc SGD","LU0208291251.USD":"FRANKLIN MUTUAL U.S. VALUE \"A\" (USD) INC"},"source_url":"https://seekingalpha.com/article/4687010-carrier-not-too-hot-yet","is_english":true,"share_image_url":"https://static.laohu8.com/5a36db9d73b4222bc376d24ccc48c8a4","article_id":"2430745610","content_text":"Carrier Global Corp. is on track to complete its transformation into a pure-play HVAC company this year, selling off non-core businesses.Despite short-term headwinds in some residential markets, secular growth opportunities exist in electrification, data center cooling, and aftermarket service.Carrier is still valued below HVAC-focused companies like Lennox and Trane, so the shares appear to have upside despite trading near all-time highs.   vchal/iStock via Getty Images Transformation Is Underway The last time I wrote about Carrier Global Corp. (NYSE:NYSE:CARR) in December 2023, the company's plans to transform into a pure-play HVAC company were in place, but the exact timing and details were a bit uncertain. Since then, the company closed its purchase of German premium heat pump and home solar generation system manufacturer Viessman Climate Solutions. Also, sales were announced for businesses in Security, Commercial Refrigeration, and Industrial Fire. These sales are expected to close just after mid-year. The only piece left to sell is Residential and Commercial Fire, and Carrier expects to start marketing the business in the next few weeks for a sale by the end of the year. Carrier The intent of this reshuffle is to offload some healthy but slow-growing businesses and focus on HVAC, with its secular growth trends in electrification, indoor air quality, and data center cooling. Carrier should therefore receive a richer valuation like other pure-play HVAC companies. While Carrier stock is now trading close to an all-time high, it still underperformed relative to its domestic peers since my last article. Japanese firm Daikin (OTCPK:DKILY) (OTCPK:DKILF) did even worse, although it has headwinds from weaker yen results when translated into dollars and weak Asian business environment and market share loss. Data by YCharts Viessmann is underperforming this year compared to initial expectations, but this was due to some temporary uncertainty around government incentives for heat pumps, as well as lower demand for solar installations. With more clarity on the subsidies in Europe, business should pick up in the second half of the year. The residential market has been weak worldwide, but North America looks ready to turn up again. Commercial HVAC is another source of strength. Looking forward, Carrier has an opportunity to globally apply the best technologies and operations from the several regional HVAC businesses it has acquired - Toshiba, Giwee, and Viessmann. This will create cost synergies and margin expansion as well as revenue synergies by selling the best products outside of their original regions. Carrier still looks cheaper than its pure-play HVAC peers and remains a Buy even near all-time highs. Viessmann And Other Residential HVAC Viessmann's first year as a part of Carrier is off to a tough start. Sales in Q1 were down 12%, although more than half of this decline was in the lower-margin solar panel business. As I mentioned in December, suspension of some environmental subsidies in Germany caused consumers to step back from heat pump purchases this year. Germany has since updated their program, along with many other European countries. As discussed on the earnings call, Viessmann is also rolling out larger units than what they have historically sold, which will enable them to sell into small multifamily residential buildings. This would be a new market for Viessmann. Carrier is on track to deliver $75 million of cost synergies with Viessmann this year, on the way to $200 million in 2026.  North American residential HVAC sales were down mid-single digits, with a slowdown in the housing market. This appears to be turning, as Carrier is seeing new orders up slightly this year. Some of this is due to the desire of distributors to buy units that use R-410A refrigerant before it is phased out and the more expensive R-454B refrigerant is required.  Commercial HVAC Commercial HVAC has been a strong point for Carrier, with double digit growth. Schools and health care continue to pursue upgrades with the need to improve indoor air quality. Data Centers were another market vertical mentioned by Carrier in the presentation. They see the addressable market for HVAC in data centers more than doubling in the next 4 years. Finally, aftermarket business remains a focus for Carrier. Nearly half the chillers sold are under a long-term maintenance agreement, and a majority of these are digitally connected, using apps to allow for remote monitoring and control.  Financial Update At first glance, Carrier's guidance update looked concerning, but nearly all of the changes are due to an earlier sale of the Industrial Fire business. Sales have been revised lower by $500 million to $26 billion. This is partially due to lower sales at Viessmann and the rest is due to the Industrial Fire divestment. The good news is that Carrier is able to control costs, resulting in the margin forecast moving to the top of its previous range. This leaves the EPS estimate unchanged. Free cash flow this year, already low at $700 million, was revised down to $400 million, but this was due to additional taxes on the gain from the Industrial Fire divestment being paid this year. Carrier Carrier currently has a high level of debt following the Viessmann acquisition, but the company now has a clear path to pay down most of this with divestment proceeds. Management stated that they now expect to reach net debt/EBITDA leverage of 2 by the end of 2024, which would enable the company to resume share buybacks. Carrier would like to at least buy back the shares issued in the Viessmann deal.  To verify this, I translated the $2.85 EPS guidance into EBITDA, and I get $5.1 billion based on the following calculation: Author Spreadsheet Carrier ended Q1 with $15.6 billion of net debt. They expect to receive $7.2 billion of divestment proceeds this year, or $5.5 billion after tax. Free cash flow minus dividends for the rest of the year comes out to a small cash draw. Putting all this together, I project net debt of $10.1 billion at the end of 2024.   Author Spreadsheet As we see from the calculation, ND/EBITDA comes out just under 2 at the end of the year. With the desire to pay down debt this year and start buying back stock from the Viessmann deal next year, I would not expect much in the way of dividend increases until 2026. The company continues to believe underlying free cash flow, after all the M&A noise, to be around $2.4 billion. Buying back the stock issued in the Viessmann acquisition would cost around $3.5 billion, so after accounting for dividends at their current levels, it should take about 2 years to complete the buybacks. After that, the company will have the capability to increase dividends above the current yield around 1.3%. Valuation On a trailing EV/EBITDA basis, Carrier is valued similarly to Lennox (LII), but both are cheaper than Trane (TT). These are both pure HVAC companies, as Carrier will be after its transformation. Johnson Controls (JCI) is valued more cheaply, but it also contains many of the lower-growth businesses similar to the ones Carrier is selling. Daikin has the typical lower valuation of most Japanese companies but also operates in markets that are currently lower-growth. Seeking Alpha Using forward EBITDA estimates, the company looks even cheaper. Here are the forward EV/EBITDA multiples and EBITDA growth estimates from the Seeking Alpha peer comparison page.   Author Spreadsheet As I noted above, Carrier as a pure-play HVAC company should receive a valuation similar to Trane or Lennox. As Carrier sheds the slower growing businesses this year, I expect the market to value it closer to these companies. To be a bit more conservative considering Carrier's first year as a pure-play HVAC company a number at the low end of this range would be appropriate. A fair EV/EBITDA multiple for Carrier would be around 18 on that basis. Using my EBITDA estimate from earlier in the article of $4.92 billion excluding Refrigeration and Fire & Security, a fair enterprise value for Carrier would be $4.92 * 18 = $88.56 billion. If we subtract the expected $10.14 billion of net debt at year-end 2024 from this enterprise value, we get a fair market cap of $78.42 billion. Dividing by the share count of 915 million shares, we arrive at a price target of $85.70. Risks The biggest risk for Carrier is any slowdown or reversal in the trend toward electrification of HVAC and demand for heat pumps, especially in Europe. As we are seeing in Viessmann's Q1 results, even a little uncertainty in government support of heat pumps can result in consumers stepping away from the market. While the integration of Viessmann appears to be progressing well, cross-marketing their products into other regions of the world is so far untested and customers outside of Europe may not be interested in Viessmann's premium products.  Within the US, there is risk that demand for systems that use R-410A refrigerant before it is phased out could just pull forward demand from next year, resulting in a sales slowdown in 2025.  Finally, an economic downturn in certain risky real estate segments such as the Chinese residential market or commercial office buildings globally would create temporary headwinds for Carrier. Conclusion Carrier share price is near all-time highs following a good Q1 2024 earnings release. Still, the company is cheap relative to its US based pure play HVAC peers. Shares would have about 50% upside if valued similarly to Lennox and Trane on forward EV/EBITDA. I do not think this valuation will be achieved quickly. Carrier will have to demonstrate that it can achieve similar growth rates in its first year as a pure-play HVAC company.   There are some temporary headwinds, especially in Europe, that could put this growth at risk. In the long term, however, electrification of HVAC and the predominance of heat pumps seems likely. Carrier has just begun to find cost synergies from the Viessman merger. Revenue synergy opportunities also exist, bringing the best products from Toshiba in Japan, Giwee in China, and Viessman in Germany to the rest of the world. Adding in secular growth opportunities like data centers, aftermarket growth, and digital monitoring and control apps, Carrier has the growth runway to make it more than just a cyclical industrial company. The market has begun to price this in but the shares are not overheated yet.","news_type":1},"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"}],"hasMoreComments":true,"newsSizeData":{"likeSize":1,"commentSize":1,"repostSize":1,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false}}