Heating, ventilation, air-conditioning, and refrigeration (HVACR) company Carrier Global (NYSE:CARR) is a company with a lot of potential, and there's a good chance it could be generating significantly more profit in the future. Here's how, and why the company is worth a good look for any investor's portfolio.

Carrier has a bright future

The case behind buying stock in Carrier is based on the idea that the company's separation from the former United Technologies company will free up its management to pursue a number of growth opportunities:

  • Management is undertaking an aggressive program of cutting its annual costs by $600 million in 2022.
  • The separation will allow the company to increase its focus on expanding its presence in Asia and increasing its share of revenue from aftermarket parts and services.
  • The HVACR sector is benefiting from a number of favorable megatrends, which look set to provide long-term tailwinds for the company.
  • The HVACR industry is strongly believed to be set for a period of industry consolidation, and Carrier is now free to take part in it.
  • Management is also committed to reviewing the portfolio of businesses in order to extract maximum value for shareholders.
A young couple enjoying air-conditioning.

Image source: Getty Images.

Cost cuts and growth opportunities

To flesh out these points, it's useful to look at just how the industrial company makes money, and some of the growth opportunities by segment.

Segment

Sales 2019

Adjusted Operating Profit 2019

Notes

Key Growth Opportunity

HVAC

$9.7 billion

$1.6 billion

60% commercial, 40% residential

Expand in Asia and increase aftermarket revenue

Fire and Security

$5.5 billion

$0.7 billion

60% products, 40% field-based revenue

Take advantage of increasing regulatory measures around fire and security, and expand digital offerings

Refrigeration

$3.8 billion

$0.5 billion

66% transport refrigeration, 33% commercial refrigeration. 75% equipment, 25% services and digital

Expand cold-chain-based sales, and digital/services offerings

Data source: Carrier presentations. Author's analysis.

As you can see above, Carrier generated $2.6 billion in adjusted operating profit in 2019, so the plan to take a scalpel to its cost structure by reducing annual costs by $600 million by 2022 is highly significant. The bulk of the cuts will come from consolidating some of the six thousand suppliers that Carrier had at the end of 2019, while increasing automation is set to reduce factory costs.

Turning to the revenue growth opportunities, at the company's investor meeting in February CEO Dave Gitlin outlined that 85% of the company's sales were in the U.S. and Europe. Therefore, there's clearly an opportunity to expand into some of the higher-growth developing countries.

Similarly, Gitlin said 70% of the company's sales were in original equipment, with 30% in the aftermarket. That's slightly below rival Trane Technologies (NYSE:TT), which has a ratio of 69% equipment/31% parts and services revenue, so there's clearly an opportunity for both companies to increase aftermarket sales, particularly with digital solutions.

Favorable megatrends

HVACR may not seem like the sexiest of industries, but both Carrier and Trane see mid-single-digit revenue growth opportunities coming from a combination of climate change, the growth of the middle class in the developing world, increasing urbanization, and growth in the use of digital devices (internet of things), which will favor higher-quality air-conditioning manufacturers like Carrier and Trane.

Urbanization is causing city temperatures to rise.

Image source: Getty Images.

Industry consolidation and portfolio restructuring

The separation should also allow Carrier to take part in any potential consolidation in the HVACR industry. It's an ongoing discussion in the industry, but considering that Trane is now separate from Ingersoll-Rand, and another rival, Johnson Controls, is now a building-solutions-focused company, it's reasonable to expect some action on this front.

Carrier could take part in industry consolidation, and its management may also decide to reshape the business by selling its fire and security products business Chubb -- a business that the formerly combined United Technologies was believed to be close to selling in 2019. A future sale of Chubb would create an even stronger focus on HVACR.

Looking ahead

All told, a combination of cost cuts alongside near- and long-term growth opportunities make Carrier a company that looks set for some significant earnings growth in the future. The company's best days are definitely ahead of it, and the stock is worth looking at for long-term investors.

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.