Countries around the globe, including the U.S., have set lofty goals to reduce carbon emissions. In doing so, they have applied pressure to corporations to reduce their carbon footprints to meet environmental goals.
You may not typically associate HVAC or refrigeration with huge potential to reduce carbon emissions. But Carrier Global (CARR 1.05%) has digitally enhanced its HVAC systems to run on cloud-based platforms that allow them to reduce cost, work more efficiently, and lessen the environmental impact of its customers.
Carrier's cost-reducing approach to solving its commercial customers' carbon footprint goals could provide a long runway for growth. Let's take a closer look.
Benefiting from ESG trends
Even before its spin-off from United Technologies (RTX -0.17%) in March 2020, Carrier has been working to reduce operating costs and carbon footprint for its commercial customers by advancing the technology of its systems.
For example, Carrier's traditional refrigeration segment sells refrigerated cabinets and freezers designed for trucks, trailers, shipping containers, food retail, and warehouses. In recent years, Carrier has added monitoring services that can improve the efficiency of each individual asset.
More recently, Carrier has collaborated with Amazon Web Services to create its Lynx platform, which monitors all the cooling equipment along the customer's entire supply chain. Lynx adds prognostics to the supply chain, reduces food waste, downtime, and increases operating efficiency for customers.
Carrier boasts the industry's largest installed base and service network, which has allowed the company to double its Lynx subscriptions over the last 12 months. The installed base, combined with a number of compelling use cases, leads me to believe the aftermarket growth trajectory is achievable.
Image source: Carrier Global investor day presentation.
With Lynx, Carrier is one of the first to the market, leaving top competitors playing catch-up.
On the HVAC side, Carrier has developed BluEdge, a platform that performs similar duties to Lynx but for commercial heating and cooling. Though BluEdge is a newer platform than Lynx, it has a slightly larger installed base. Carrier has already signed 30,000 BluEge service agreements. Johnson Controls International also has a competing connected HVAC platform, making what looks like a two-horse race.
Lynx and BluEdge's ability to forecast problems with equipment lead management to foresee high-single-digits to low-double-digit growth in its aftermarket business, which currently makes up about a quarter of overall revenue. The company's recent investor day presentation spells out the case for aftermarket revenue to grow from $4.5 billion in 2021 to over $7 billion by 2026.
Also, by 2026, Carrier predicts it will grow its digital subscription installed base from its current 96,000 to over 1 million.
In addition to the commercial opportunity, Carrier sees value for the environment. The company has several environmental, social, and governance (ESG) goals it hopes to achieve by 2030. Most notably, it plans to reduce customers' carbon footprint by 1 gigaton by increasing efficiencies and reducing food spoilage.
Image source: Getty Images.
Investors may also join the party. Over the last few years, trillions of dollars have flowed into dedicated ESG funds. Carrier could very well be in their universe.
Given the political pressure on companies to reduce their environmental impact, a cost-effective solution like Carrier's seems like a no-brainer. If that's the case, Carrier could have a long run ahead of it.
But should you jump in?
Is Carrier stock a buy?
Carrier finished 2021 by raising its full-year earnings guidance in the third quarter and surpassing it in the fourth, coming in at $2.26. This year, it forecast earnings per share (EPS) of $2.20 to $2.30. The flat guidance actually reflects EPS growth, offset by the sale of its Chubb Fire and Security business in late 2020.
That guidance didn't change when the company reported results for the first quarter of 2022 on Thursday. Carrier delivered lower-than-expected free cash flow for the first quarter due to inventory-related supply chain issues at its Chinese production facilities. Despite the setback, the company reiterated its 2022 free cash flow guidance of roughly $1.65 billion.
Supply chain issues have taken a toll on many industrial companies like Carrier this year. Carrier's stock is down 29% since the end of 2021 and hit a new 52-week low on Friday as Chinese coronavirus lockdowns shutter its plants. If lockdowns persist, Carrier has about $3.6 billion in cash on the balance sheet. So its long-term plans to increase its dividend (currently yielding 1.4%) and continue share repurchases may not be at risk.
After the stock's decline, it's trading at 17 times this year's expected earnings. Although inflation will play a role in the company's results this year, there is plenty to get excited about. Carrier has had a positive and profitable impact on its customers' environmental concerns, which are likely to continue throughout the decade. The stock's decline could be a great entry point for long-term investors.
