Please ensure Javascript is enabled for purposes of website accessibility

Is Carrier Stock a Buy?

By Lee Samaha – May 20, 2020 at 11:20AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Assessing the investment case for the leading U.S. air conditioning company.

Life hasn't started out easy for heating, ventilation, air conditioning and refrigeration (HVACR) and fire security company Carrier (CARR -2.59%) since it became a publicly traded company in early April. The company's spin out from the former United Technologies was supposed to usher in a period of change -- the expectation being that management would be unleashed in order to fully realize the potential in Carrier's portfolio. Unfortunately, the COVID-19 pandemic had other ideas, and the company has immediately faced headwinds. Let's take a look at the investment case for the stock as it stands now.

The case for buying Carrier stock

Putting valuation aside for the moment, there are probably two key arguments for the underlying investment case in the industrial stock:

  • As a stand-alone company, Carrier is now free to take action to improve margin, and win market share from competitors like Trane Technologies and Johnson Controls.
  • Along with its peers, Carrier has a long-term opportunity to benefit from so-called mega-trends favoring HVACR -- urbanization, a growing middle class demanding indoor climate control, rising urban temperatures, and regulation around HVACR.

On the first point, Carrier's plan is to cut costs by $600 million by 2022 -- the so-called Carrier 600 plan -- with around 55% of it coming from reducing supply chain costs by consolidating suppliers. The rest will come from cutting factory costs by increasing automated production, and improving productivity of general and administrative work. Given that adjusted operating profit was just $2.6 billion in 2019, the cost reduction plans look significant.

Meanwhile, the HVACR mega-trends will remain in place leading to mid-single-digit revenue growth over the medium term.

It's a compelling case, or rather it would have been had the COVID-19 pandemic not come along in order to throw a spanner in the works.

Along comes COVID-19

The effect of COVID-19 on the company can immediately be seen in the change in the management's outlook for 2020. As you can see below, there are some hefty reductions in expectations, and the wide range in current expectations reflects the uncertainty in the global economy.

A collection of HVAC fans.

HVAC units. Image source: Getty Images.

In case you are wondering why sales and adjusted operating profit were only expected to make a modest improvement in the original guidance, it comes down to a collection of near-term headwinds in each of its businesses.

For example, HVAC ($9.7 billion worth of sales in 2019) is coming up against a difficult comparison with last year because customers were buying ahead of a regulatory change. Carrier wound down its residential intrusion business in the fire and safety segment (overall sales of $5.5 billion in 2019), meaning sales were going to decline anyway. Finally, the refrigeration segment ($3.8 billion sales in 2019) faces headwinds from the cyclical slowdown in the trucking market (transport refrigeration).

As such, the best way to make a comparison is to look at the prior guidance and then the updated current scenarios.


Current Scenarios

Prior Guidance for 2020



$15 billion to $17 billion

Up slightly from 2019

$18.6 billion

Adjusted operating profit

$1.7 billion to $2 billion

Up $25 million-$75 million from 2019

$2.6 billion*

Free cash flow

More than $1 billion

$1.3 billion to $1.4 billion

$1.8 billion

Data source: Carrier presentations. *stand-alone pro forma

Management's actions

In response to the slowdown, Carrier's management took the following actions:

  • Increased cost-saving activities, with $425 million expected to be cut from costs in 2020.
  • Cut 2020 capital spending plans from $350 million-$400 million to a new range of $200 million-$225 million.
  • Deferred and scaled back expectations for initiation of a dividend, but management promised more news on that in the near future.

The last two actions make perfect sense in the current environment, not least because Carrier has slightly more than $11 billion in long-term debt on its balance sheet. In other words, it needs to preserve cash in order to avoid any potential liquidity pressures.

The cost savings are a combination of delivering $225 million in costs savings in 2020 from the Carrier 600 plan (the original expectation was for $175 million) and reducing investment to $75 million from an original plan for $150 million. In addition, management is reacting to the COVID-19 pandemic by cutting a further $300 million in costs (mainly furloughing) offset by a $200 million increase in costs caused by COVID-19.

Woman and teenage girl on couch

Air conditioning is regarded as an essential by many families. Image source: Getty Images.

The end result is a net reduction of $250 million in costs in 2020. compared to an original plan for a net reduction of $25 million. That's fine, but note that it implies some deferred investment and capital spending that might need to be undertaken in the future.

Time to buy?

The company trades on just 14 times its projected free cash flow for 2020. If that proves to be the bottom, then even a moderate improvement in the economy from then on would make Carrier an attractive long-term investment at this level.

That said, for most investors the answer has to be "no." The company has a market cap of $14 billion and $11 billion in long-term debt. That's fair enough, but it's also trading in markets that are going to be pressured if the economy turns down. In other words, the downside is significant if things go wrong. Carrier is an interesting value stock, but it's definitely for those who are confident of an economic recovery in 2021.

Lee Samaha owns shares of Trane Technologies plc. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Carrier Global Corporation Stock Quote
Carrier Global Corporation
$37.21 (-2.59%) $0.99
Trane Technologies plc Stock Quote
Trane Technologies plc
$151.57 (-1.39%) $-2.14

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 10/07/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.