It's been a momentous year for heating, ventilation, and air conditioning (HVAC) company Carrier Global (CARR 9.20%). The company was created out of the breakup of United Technologies, and since the first day of its listing the stock has risen 221%. At this moment many investors might be thinking about an exit point, but there's a strong case for the stock still being a great value. Here are seven reasons why.
Valuation
Despite the strong rise, Carrier's valuation still looks attractive. Management expects adjusted operating profit of $2.2 billion and free cash flow (FCF) of $1.5 billion. Based on these figures, Carrier trades on 22.7 times earnings and 21.9 times FCF in 2020. Those figures don't make the stock look like a particularly good value, but they need to be put in the context of a company targeting $700 million in annual run rate cost savings by 2022.
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As such, Carrier is expected to grow earnings significantly over the next couple of years. A combination of mid-single-digit revenue growth and margin expansion is expected to result in $2.20 in EPS and $1.8 billion in FCF. Those figures would put Carrier on a price-to-earnings multiple of 17.6 times earnings and 19 times FCF in 2022 -- good multiples for a company with long-term growth opportunities.
Growth prospects
The underlying growth prospects of the HVAC industry remain very good. For example, increasing urbanization in the world is leading to rising temperatures in cities, and that will stimulate demand. Moreover, growth of the middle classes in the emerging world is leading to more demand for HVAC in general.
Throw in increasingly stringent environmental regulations around HVAC (which favor the higher-quality players like Carrier), and the underlying growth prospects are ensured.
The coronavirus pandemic will help growth
Carrier is one of the companies that could emerge as a beneficiary of the pandemic. This argument works in two ways. First, there's likely to be an increased awareness around keeping buildings healthy and clean, and that plays to the advantage of HVAC suppliers. Not only does air need to be filtered, but it needs to be changed regularly.
Second, Carrier's transport refrigeration solutions (refrigeration units for trucks) are likely to play a major role in distributing vaccines around the globe. Not only will Carrier receive some near-term benefit from vaccine distribution, but if countries, particularly in the emerging world, start building out cold chain capability, long-term demand for Carrier's products is likely to benefit as well.
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Carrier could sell its security business
The company's core HVAC segment (57% of 2019 segment profits) and its refrigeration segment (18%) fit together well, but the fire and security business (25%) is arguably the odd one out. Indeed, when it was under the former United Technologies business, management was believed to be exploring a sale of the Chubb fire and security business for $3 billion.
It's possible that Carrier could also sell the Chubb business, and in doing so, increase its focus on HVAC solutions. Moreover, the cash injection could help fuel some acquisition activity -- a key part of the reason for the spin-off from United Technologies.
Operational improvements
Aside from end market growth, Carrier also has an opportunity to improve how it operates within its end markets. Specifically, management intends to increase its exposure to the fast-growing markets in Asia. In addition, there's an opportunity to increase aftermarket sales, particularly if the use of digital technologies (web enabled devices) helps identify problems earlier.
In fact, increasing digitalization of HVAC equipment is a growth opportunity in itself for Carrier. Using the Internet of Things, Carrier's technicians will be better able to monitor and repair equipment, while building owners will be better able to monitor building performance. Again, that's something likely to favor the higher-quality players like Carrier.
Room to run?
All told, Carrier's stock has had a great 2020, but there's plenty of potential for another good year in 2021. The valuation remains attractive and long-term prospects are excellent, and enhanced by the COVID-19 pandemic. As such, Carrier is a good option for investors in 2021.
