Carrier Global Corporation

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 4/5

A global leader providing healthy, safe, sustainable, and intelligent building and cold chain solutions, including HVAC, refrigeration, and fire & security segments.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Carrier Global Corporation (CARR) is a global leader in providing diversified solutions, including heating, air conditioning, refrigeration, and fire & security systems. Their offerings span a range of markets including commercial, residential, and industrial sectors.

The company’s revenues are distributed across three main segments:

  • HVAC (Heating, Ventilation, and Air Conditioning): This segment constitutes the majority of revenue for Carrier. It provides climate-control solutions for both commercial and residential buildings. This includes equipment like air conditioners, heaters, and ventilation systems.
  • Refrigeration: This segment provides refrigeration equipment for the transportation of goods, as well as for commercial spaces. This includes truck-trailer refrigeration systems and display cases for grocery stores.
  • Fire & Security: This segment provides fire-safety and security systems for buildings. Products include fire detection, alarms, and suppression systems as well as security systems like cameras and access control.

The industries Carrier operates in are generally fragmented and are subject to varying regulatory pressures and technological trends.

  • HVAC: The HVAC sector is influenced by construction spending, energy-efficiency regulations, and trends in climate change. There is growing interest in sustainable and energy-efficient HVAC solutions.
  • Refrigeration: This market is affected by the food production and logistics markets. Growth in this industry depends on the demand for refrigerated transport of food, and increasingly for pharmaceutical and other temperature sensitive products.
  • Fire & Security: Driven by an increase in security risks and a need for higher safety standards, this segment sees strong, steady demand, but is also very competitive with many smaller players in the market.

Carrier is positioned as a global leader in providing solutions with a focus on the technology needed to meet consumer demands for smart and intelligent systems. It also has a vast global infrastructure and supply chain network. It competes with larger players like Trane and Lennox in each of the segments and has a broad geographic distribution.

Competitive Advantage (Moat)

While Carrier is a major player, it doesn’t have significant unique advantages that translate into wide, sustainable competitive advantages or wide moat. Carrier’s moat is relatively narrow, rating a 2/5 for a couple of key reasons:

  • Scale: Carrier has a significant size advantage, particularly within the HVAC segment, which allows it to secure advantageous supply contracts and produce goods on a mass scale. They operate on a massive scale, and thus are able to make more money at the lower cost with their operations. They are able to outcompete smaller players with this scale.
  • Geographic Distribution: With distribution channels spread worldwide, Carrier is able to reach more customers effectively. Their international presence makes it extremely hard for smaller companies to get into the market because of the logistics problems.
  • Innovation: While most of their products are not complex, some of them require innovation. An example of that is more efficient and eco-friendly products, which are very important in today’s market, and companies are able to take advantage by having a good R&D unit.

However, several threats to their moat must be considered:

  • Commoditized products: HVAC and refrigeration, though technologically complex, are susceptible to commoditization. The increasing availability of new brands from countries such as China makes it harder for a company like Carrier to leverage their size or geographic advantage fully.
  • Vulnerability to government regulations: Government regulations and energy rebates are changing the market in ways that might benefit some companies, as well as the prices consumers pay. Government regulations can also limit the business or the ability of the company to set the right prices.
  • Intense competition: The business and the sub-markets are highly competitive, with both local and international competitors providing comparable and similar products to those from the company.
  • Technological Disruption: Software is increasingly becoming an important part of the mechanical systems in building, and new firms might have a chance to leapfrog incumbents by innovating in software.

Business Resilience

Carrier’s core businesses – HVAC, refrigeration, and fire & security – have varied sensitivity to different risks in the economy. A downturn in real estate would definitely decrease the sales of their HVAC and building related products, while economic factors have less impact on fire and security. So, it seems like the company could be resilient in downturns. However, that does not guarantee the success. The company also has a diversified customer base as well as geographical distribution, so it is somewhat better insulated from one or two key economic regions taking a downturn.

Major risks to consider:

  • Supply Chain Disruptions: Like many other manufacturing companies, Carrier is exposed to supply chain risks and volatility. With the ongoing situation with global supply chains, it will be harder to effectively predict revenue, margins, and performance.
  • Raw Materials and Inflation: Carrier’s operating results are sensitive to changes in prices of raw materials and commodities, as they have a direct impact on costs and revenue. Inflation may cause a decrease in net income and impact the financials.
  • Cyclicality: As companies in sectors like building and infrastructure, Carrier is somewhat tied to economic activity. In a recession, sales might be lower, and this could negatively impact financials, margins, and profits.
  • Fluctuations in Interest Rates: With changing interest rates and its leveraged capitalization, Carrier might be subject to rising interest expenses, which will eat into profits.
  • Geopolitical Risks: Carrier is a multinational business that depends on the economies, supply chains, and regulations of a variety of countries. Changes in the relationship between nations may affect the company operations, revenues, and supply chains.

Financial Analysis

Carrier has relatively steady financials, with good cash reserves and a comfortable level of debt. Based on the recent quarterly reports, the company seems to be doing well.

  • Revenues: Total revenues for the nine months ending September 30, 2023, were $15.2 billion. They saw growth in total sales and in each segment (HVAC, refrigeration, and fire & security). Also, while there was an increase in sales year-over-year, they were partially impacted by negative revenue from acquisitions.
  • Margins: Operating margins for the company is about 15%. Gross margins are at 30%, but it is expected to expand due to strong pricing and strategic growth in high-margin products.
  • Net Income: Total earnings for the nine months ended September 30, 2023, was $1 billion, which is an impressive number. Net profit per share is at $1.17. The company is experiencing a significant increase in profits from previous years as well as growth in all segments.
  • Cash Flow: Net cash from operating activities is at $2.8 billion, which is a strong number. This includes proceeds from divestiture activity. They were able to decrease debt and initiate share repurchases. Free cash flow was a strong $2.2 billion.
  • Debt: Debt was stable, at $11.7 billion. Their Debt to Equity ratio is approximately 2x, which is reasonable. They have made moves to repay their debt and increase the portion of shares repurchased and dividends.
  • Guidance: The company raised guidance for sales in 2024 due to better-than-expected demand, and continues to do well.

The balance sheet health is 4 / 5. While they have taken on debt, they are deleveraging and have managed to maintain their credit rating despite the macroeconomic and industry challenges. They have strong cash flow from operations, and decent cash reserves to tide them through any downturn.

Understandability

The business is relatively easy to understand, but there is some degree of complexity associated with reading the financial statements.

  • The business and what they do is relatively easy to understand, but that is only on the basic level. Getting to the details of how their business model works, the specifics of the industry, and the impacts of various factors, including regulations and macroeconomics, can be tough to understand. Also, the large number of acquisitions and divestiture can further complicate the understanding.
  • The balance sheet for the company is complex, with several sections and notes that are not readily clear. For an amateur investor, figuring everything out will be time-consuming and will require significant effort.
  • The company’s business spans over 100 countries. The effect that those countries, and their respective economies, have on the company’s financials are not immediately obvious and add to the complexity in understanding the company.

Thus I would rate understandability at 2/5.

Summary

Overall, Carrier Global Corporation appears to be a major player in its industries with a strong brand recognition and decent size. They are also focused on increasing their profitability and reducing debt, while also returning capital to shareholders. They have significant exposure to certain macroeconomic factors and their industry is very competitive, and some of their moats could easily be breached by competitors, which is a downside. Their current valuation and financial position are reasonable.