Quick Value 7.27.20 (CARR)

Carrier Global Corp (CARR)

Market Performance

[Index | % change WoW ]

S&P 500 | 3216 unch
Dow Jones | 26470 unch
Russell 2000 | 1468 unch
Russell Microcap | 552 unch
10-Year | 0.59% -4bps
Gold | 1900 +5%
Oil | 41 unch
VIX | 26 unch

Not much fluctuation overall in markets over the past week…

Market Stats

Taking a look at the 2020 and 2021 earnings estimates for the S&P 500

I find it interesting that estimates for 2021 have settled in at the $163 level — indicating a full recovery from 2019 to 2021. This seems like a bit of a stretch given how Q1 earnings have been progressing.

We have the S&P 500, currently trading at 3216, valued at 25-26x 2020 earnings and 19.7x 2021 earnings.

Quick Value

Carrier Global Corp (CARR)

Picking up the final piece of the former United Technologies… Carrier Global (CARR) sells and services HVAC, refrigeration, fire & safety equipment. It was spun off from United Tech in April 2020.

There are 866m shares outstanding x $26.60 = $23bn market cap. Add in another $10.5bn in net debt and this is a $33.5bn enterprise value.

Of the $18.6bn in 2019 sales — 72% came from new equipment sales and 28% from services and aftermarket. It’s fascinating how much this differs from Otis elevators — where service was 57% of sales and 80% of operating profit! Perhaps there is significant growth opportunity on the service/aftermarket side for Carrier?

These are popular brands with a combination of commercial and residential offerings…

Carrier highlights the “megatrends” at play in this industry — namely: higher temperatures, growing global middle class, and trends toward urbanization…

At the time of the spin, pro-forma 2019 earnings were roughly $2 per share which would = 13.3x PE ratio

…but

COVID is impacting this business just as it has others — sales were down 10% in Q1 2020 and operating profit was down 37%. Consensus estimates call for $1.65 in 2021 earnings = 16x earnings.

Carrier also hopes to convert earnings to free cash flow at a 90-100% rate. This should give them some $1.4-1.7bn in annual free cash flow to dedicate to buybacks or M&A.

Similar to its sister spin-off, Otis, Carrier relies on its leading market share positions to expand sales of new equipment which leads to the large and growing installed base of equipment for high-margin service and aftermarket sales.

Is the stability of this business enough to warrant a high multiple? Perhaps. Clearly, the business has not been completely immune to the COVID impact.