Who would have bet in early 2020 that a company in the industrials sector (rather than, say, one in the technology sector) would be the year's best-performing stock on the S&P 500 index at the end of the third quarter?
Probably not many investors.
Though, indeed, thanks to racing out of the spinoff gate, Carrier Global (CARR 9.45%), best known as a maker of heating, ventilation, and air-conditioning (HVAC) systems, edged out graphics-chip specialist NVIDIA (NVDA +1.31%) as the year's best-performing S&P 500 stock through the end of September.
Let's look at these diverse winners.
Image source: Getty Images.
Overview
|
Company |
Market Cap |
Forward P/E |
Wall Street's Projected Annualized 5-Year EPS Growth (Decline) |
Return for First Three Quarters of 2020* |
YTD 2020 Return/5-Year Return |
|---|---|---|---|---|---|
| Carrier Global | $28 billion |
19 | (8.7%) | 131%** | 146%/ N/A |
| NVIDIA | $352 billion |
52 | 17.4% | 130% |
143%/2,110% |
|
S&P 500 |
-- | -- | -- | 5.5% | 10.3%/93.9% |
|
Nasdaq |
-- | -- | -- | 25.5% | 32.2%/147% |
Data source: Yahoo! Finance and YCharts. YTD = year to date. *Data through Sept. 30, 2020; all other data is as of Oct. 13, 2020. **Starting from the date the fully spun-off entity could be publicly traded.
Carrier Global: Returned 131% in 2020 through Q3
Many consumers probably associate Carrier with air-conditioners, and with good reason. In 1902, Willis Carrier invented the modern electrical air-conditioning unit. And 13 years later, the New York state native co-founded the company that bears his name.
Today, Carrier is a leading global manufacturer of HVAC systems for residential and commercial buildings, refrigerated equipment for truck trailers and containers, fire detection and suppression systems, and security and building automation technologies.
In April, Carrier became an independent entity again after four decades of being owned by aerospace and defense giant United Technologies, which spun off Carrier and its Otis elevator unit, now Otis Worldwide. (Following the spinoffs, United Technologies merged with Raytheon, to form what is now Raytheon Technologies.)
Given this history, Carrier has only a brief recent track record as an independent company. Moreover, it became a stand-alone entity during the COVID-19 pandemic, so its recent financial performance reflects that fact.
That said, in the second quarter, Carrier's sales fell 20% year over year to $3.97 billion. The company attributed the decline largely to the pandemic's effects across its three business units, HVAC, refrigeration, and fire and security. Adjusted for one-time items, including restructuring charges, net income declined 54% to $286 million, or $0.33 per share.
Free cash flow, however, remained rather robust and resilient. In Q2, Carrier generated $463 million in free cash flow, down just 8% from the year-ago period.
Wall Street expects Carrier's earnings to decline at an average annual rate of 8.7% over the next five years. But the stock seems worth watching for several reasons, including the company's ability to churn out cash. Over longer periods, cash flows are a better measure of a company's performance than is net income, or "earnings," which is just an accounting measure.
Moreover, both the pandemic and climate change could be notable tailwinds over the long term. The COVID crisis has underscored the importance of quality HVAC systems in maintaining healthier indoor air quality. And global warming could increase sales of air-conditioning systems.
Investors don't have long to wait for material news. Carrier is slated to report its third-quarter results on Thursday, Oct. 29, before the market open.
NVIDIA: Returned 130% in 2020 through Q3
Despite challenges from the pandemic, graphics processing units (GPU) specialist NVIDIA has been posting strong organic growth in its two largest market platforms, data center and computer gaming. Together, these two businesses accounted for 88% of its total revenue in the fiscal second quarter of 2021, ending in late July.
Moreover, the company's April acquisition of Mellanox Technologies, a maker of high-performance networking products, has begun boosting sales in its data center business. Thanks to this acquisition, in the fiscal second quarter, NVIDIA's data center platform overtook its gaming platform as its largest business by revenue.
It's a good thing that in recent years, data center's revenue has been increasing more rapidly than that of the other market platforms (gaming, professional visualization, and auto), driven largely by the growing adoption of cloud computing and artificial intelligence (AI). While NVIDIA doesn't share profitability figures for its platforms, we can probably safely assume from the numbers it does provide that data center tops the profitability list.
The data center business is poised to get much bigger and more diverse. In mid-September, NVIDIA announced plans to acquire U.K.-based Arm, a leading chip designer and licensor owned by Japan's SoftBank Group. The $40 billion deal, which NVIDIA will finance through a combination of cash and stock, is expected to close in about 18 months.
While the auto platform is small, contributing just 3% of NVIDIA's total revenue in the fiscal second quarter, it has enormous growth potential from the coming driverless-vehicle revolution.
In the second quarter of fiscal 2021, NVIDIA's revenue grew 50% year over year to $3.87 billion. Organic revenue growth, which excludes the contribution from Mellanox, was about 29%. Adjusted earnings per share soared 76% year over year to $2.18.
NVIDIA stock is a great way to bet on the growth of gaming, cloud computing, AI, and autonomous vehicles. For many years, Wall Street has rather consistently and significantly underestimated NVIDIA's future earnings growth. So there's good reason to believe that the company will continue to outperform analysts' estimates.
Mark your calendar: NVIDIA is scheduled to report its results for the third quarter of fiscal 2021 on Wednesday, Nov. 18, after the market close.
