What happened

Shares in heating, ventilation, air conditioning, and refrigeration (HVACR) company Carrier (NYSE:CARR) rose 16.8% in May, according to data provided by S&P Global Market Intelligence. The move marks a double-digit outperformance compared to the S&P 500 and to its closest peer, Trane Technologies.

As a newly listed company -- Carrier is a spin off from the former industrial conglomerate United Technologies -- its initial earnings report was always going to be closely followed as investors get to grips with the new company. Throw in the added layer of uncertainty created by the COVID-19 pandemic, and it's understandable if investors were anticipating the worst.

An air conditioning unit.

Image source: Getty Images.

However, the earnings report, released on May 8, was better than many had feared. More importantly, so was the guidance. Management did cut sales, earnings, and cash flow guidance -- and understandably so -- but it still left the company looking a good value.

For example, free cash flow is now expected to be more than $1 billion, meaning Carrier currently trades on 19 times its expected (minimum) free cash flow in 2020. That's a good value for a company hitting what's likely to be a multi-year rough.

So what

Carrier is a very interesting investment, and trades in attractive end markets. Middle classes in developing countries are demanding more air conditioning, and the global trend towards populations urbanizing (which raises urban temperatures) continues, while climate control regulations sour demand for higher quality manufacturers like Carrier and Trane.

Add in the fact that Carrier is now no longer part of a much larger conglomerate, and its management should be able to take part in an anticipated consolidation in the HVACR sector.

That said, Carrier still carries $11 billion in long-term debt, and that could prove an issue if there's a sudden deterioration in the global economy. Moreover, the recent stock price rise has decreased the upside potential in the stock.

Now what

Looking ahead, investors will be hoping Carrier can hit its reduced earnings and free cash flow targets for 2020 while beginning to prepare for a return to growth in 2021. In addition, there's an ongoing plan to improve margins by cutting $600 million in costs by 2022.

If management can muddle through the coronavirus challenge in 2020 and start 2021 in decent shape, then there could be more upside to come from the stock.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.