It's been an excellent year for Carrier Global Corporation (CARR 9.20%) with the stock up nearly 50% on a year-to-date basis. Despite significant raw material cost increases and supply chain pressures, Carrier is emerging as one of those companies with the ability to offset them through pricing actions. That said, is the stock a good value? Let's take a closer look at the puts and takes.
Carrier in 2021
As ever, it's a good idea to track management's guidance through the year to track the changes in management's full-year guidance as the year progressed. The table below shows a familiar pattern in 2021. In line with what many other industrial companies experienced, it was clear that growth would be a lot stronger than expected at the start of the year by the second quarter.
Image source: Getty Images.
Accordingly, sales guidance increased through the year. But, at the same time, cost inflation started eating into the margin so that the company couldn't translate sales growth into margin expansion.
However, in an environment of rising costs (management sees input cost pressure of $375 million in 2021 compared to a forecast of $250 million in July), preserving margin guidance is actually a good result. As a result, earnings guidance increased throughout the year.
|
Full-year guidance |
Q3 2021 |
Q2 2021 |
Q1 2021 |
Q4 2020 |
|---|---|---|---|---|
|
Organic sales growth |
13% |
10%-12% |
5%-8% |
4%-6% |
|
Adjusted operating margin |
13.5% |
13.5% |
13.5% |
13.5% |
|
Adjusted EPS |
$2.2 |
$2.10-$2.20 |
$1.95-$2.05 |
$1.85-$1.95 |
|
Free cash flow |
$1.9 billion |
$1.9 billion |
$1.7 billion |
$1.6 billion |
Data source: Carrier Global presentations.
Pricing reasonable, orders strong
In a nutshell, Carrier is excellently pushing through price increases and implementing cost productivity actions. The key metric in the current environment is "price/cost," a figure that measures the net contribution to operating earnings from the difference between price increases and cost increases -- a positive number is good. The trend looks favorable.
For example, management said it was modestly negative in the third quarter but would turn neutral in the fourth quarter. In addition, for 2022, CEO Dave Gitlin said, "We expect inflationary headwinds, at a minimum, to be offset by the price increases that we have already implemented and others that we will be announcing by the end of this year."
For reference, management expects price/cost to be negative for 2021, shaving $0.04 in EPS for the full year, but it's expected to be neutral in the fourth quarter and then turns positive in 2022. In addition, the order trends in its business suggest Carrier will have another year of good top-line growth next year.
|
Carrier segments |
Third-quarter orders |
|---|---|
|
Heating, ventilation, and air conditioning (HVAC) |
5%-10% |
|
Refrigeration |
15%-20% |
|
Fire & security |
5%-10% |
|
Total Carrier |
5%-10% |
Data source: Carrier Global presentations.
Strategic developments
In addition, management continues to progress on its strategic growth aims outlined when it was separated from the former United Technologies in 2020. For example, management plans to increase long-term service revenue by expanding the amount of equipment under service contracts. As such, Gitlin confirmed that in commercial HVAC, "We remain on track to have 60,000 chillers under service contracts this year."
Image source: Getty Images.
Carrier is also making progress on the mergers and acquisition front. The sale of its Chubb fire and security business will give Carrier $2.6 billion in net cash. Gitlin said the company continues to "build out" its acquisition pipeline to grow the business.
Is Carrier stock a buy?
The company operates in an extremely attractive corner of the economy. HVAC benefits from strong megatrends such as demand for heating and air conditioning from the middle classes in emerging economies. In addition, increasingly stringent environmental and regulatory requirements favor the leading players. Also, the growth of the internet of things (IoT) technology to better service equipment favors higher quality players like Carrier because they can add more value to servicing equipment.
Carrier certainly has a bright future, but since it trades on more than 25 times this year's earnings, it's hard to argue that the stock is an outstanding value right now. As such, it's an excellent stock to add given any further market weakness, and long-term buyers may want to put it on the "buy on weakness" list for now.
