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When I initially invested in United Technologies Corporation (now Raytheon Technologies Corporation (RTX)) on April 18, 2008, I never quite understood the synergies between the Carrier and Otis divisions with the remainder of United Technologies.
Following the April 3, 2020 divestiture of these two divisions and the creation of Carrier Global Corporation (CARR) Otis Worldwide Corporation (OTIS), both these companies appear to have been rejuvenated.
In my April 26, 2021 post, I covered OTIS. I have also covered RTX in this guest post at Dividend Power. I now take this opportunity to review CARR.
Carrier Global - Stock Analysis - Business Overview
CARR is a leading global provider of healthy, safe and sustainable building and cold chain solutions. Its operations are classified into three segments: HVAC, Refrigeration and Fire & Security, with each segment comprised of groups of similar operating companies. Further details about each segment and its underlying brands are available here and on this Fact Sheet.
A more comprehensive overview of the company is found in Part 1 of the FY2020 10-K.
Chubb Fire & Security
The divestiture from United Technologies Corporation has enabled CARR to become increasingly focused on its core business. In keeping with this focus, management has indicated Chubb Fire & Security has been deemed to be a non-core business.
On July 27, 2021, CARR announced that it has agreed to sell its Chubb fire and security business to APi Group Corporation (APG) for an enterprise value of $3.1B. The intention is to deploy the net sale proceeds and excess cash on the balance sheet for acquisitions, share buybacks, and debt repayment over 12 - 18 months. This should help position CARR for strategic growth and to generate attractive shareholder returns through more product differentiation, faster revenue growth, higher margins and higher returns on invested capital.
The proposed sale should close in late Q4 2021 or early Q1 2022.
On the July 30 call with analysts, management stressed CARR's Global Fire & Security products business is not part of this transaction and it remains an integral part of CARR's portfolio and its healthy, safe, sustainable and intelligent building strategy.
The decision to divest Chubb Fire & Security was made following a rigorous application of CARR's strategic and financial priorities. It was deemed that within CARR's Fire & Security portfolio, the products business is differentiated with leading market positions and attractive margins. Chubb, however, is an industry leader with 13,000 employees that do a great job with installation and maintenance supporting CARR's customers. It is, however, an agnostic business that does not pull through CARR's products and it also yields lower margins.
By divesting Chubb, CARR will significantly simplify its business and help it focus on its core businesses; Chubb represents over 20% of CARR's employees and less than 10% of adjusted operating earnings.
Acquisition of Giwee Group Co.
On June 1, 2021, CARR announced that it had acquired a 70% controlling stake in Guangdong Giwee Group and its subsidiaries. Giwee is a China-based manufacturer of HVAC products, offering a portfolio of products including variable refrigerant flow, modular chillers and light commercial air conditioners.
This acquisition is an example of how CARR intends to increase its focus on its core business.
Carrier Global - Stock Analysis - Financials
Q2 and YTD2021 Financial Results
On July 29, 2021, CARR released Q2 and YTD results and also increased its FY2021 outlook; CARR's Q2 2021 10-Q is accessible here.
Free cash flow of $0.482B in Q2 reflected better-than-expected net income and was similar to Q2 2020 despite $0.18B of higher interest and tax payments.
FY2021 Guidance
In conjunction with the release of Q2 and YTD2021 results in which CARR reported $1.12 in YTD adjusted diluted EPS, management has increased FY2021 adjusted diluted EPS guidance to $2.10 - $2.20 from the prior $1.95 - $2.05. This guidance includes Chubb Fire & Security since the sale is not expected to close until late Q4 2021 or early Q1 2022.
Carrier Global - Stock Analysis - Credit Ratings
I prefer to invest in a company whose domestic unsecured long-term credit rating is investment-grade.
- Moody's assigns a Baa3 rating with a stable outlook.
- S&P Global assigns a BBB rating with a stable outlook.
- Fitch assigns a BBB- rating with a stable outlook.
The Moody's and Fitch ratings are the bottom tier of the lower-medium grade investment-grade category. The rating assigned by S&P is one notch higher at the middle tier of the lower-medium grade investment-grade category.
All 3 rating agencies define CARR as having an ADEQUATE capacity to meet its financial commitments. Adverse economic conditions or changing circumstances, however, are more likely to lead to a weakened capacity for CARR to meet its financial commitments.
CARR was saddled with ~$11B of long-term debt when it was spun off from UTX; CARR's net debt to net capitalization as of FYE2020 (December 31) was 52%. This has since been reduced to 50% with long-term debt of $9.6B as of the end of Q2 2021. Management also intends to use a portion of the proceeds from the sale of Chubb to reduce debt despite no long-term debt maturing until February 15, 2025.
CARR's current ratings and the strong probability of an improvement in the net debt to net capitalization following the sale of Chubb Fire & Security give me some reassurance that my risk exposure is acceptable.
Dividend and Dividend Yield
CARR's website does not currently maintain a dividend history but this information is accessible here.
On August 10, 2021, CARR will distribute its 3rd consecutive $0.12/quarter dividend.
Based on a $0.48 annual dividend and the current ~$54.60 share price, CARR's dividend yield is ~0.9%.
On July 29, 2021, CARR's Board of Directors approved a $1.75B stock repurchase authorization. With the remaining portion of the prior authorization, CARR now has authorization
to repurchase about $2B.
CARR repurchased 2.1 million shares and 3.1 million shares of common stock for an aggregate purchase price of $92 million and $130 million for the 3 and 6 months ended June 30, 2021, respectively. In Q2, shares were purchased at an average price of $44.33.
Investors can very likely expect an increase in the number of shares repurchased following the divestiture of Chubb Fire & Security in Q4 2021 or Q1 2022.
Carrier Global - Stock Analysis - Valuation
Using management's updated FY2021 adjusted diluted EPS guidance of $2.10 - $2.20 and the current ~$54.60 share price, the valuation is ~25.4 using the $2.15 mid-point.
The following estimates are from the 2 discount brokerage firms I use.
- FY2021: 20 brokers, mean estimate $2.16, low/high range $2.05 - $2.25. Valuation using mean estimate is ~25.3 and ~24.3 using the high end of the range.
- FY2022: 20 brokers, mean estimate $2.43, low/high range $2.16 - $2.64. Valuation using mean estimate is ~22.5 and ~20.7 using the high end of the range.
- FY2023: 11 brokers, mean estimate $2.65, low/high range $2.45 - $2.90. Valuation using mean estimate is ~20.6 and ~18.9 using the high end of the range.
I am always reluctant to rely heavily on earnings estimates well out on the calendar and CARR is a good example of why. Within the next few months, we can expect the divestiture of Chubb Fire & Security and an influx of ~$3.1B. Management has communicated its plan to reinvest the proceeds consistent with capital allocation priorities to create long-term shareholder value; deployment of the sale proceeds and excess cash on the balance sheet will very likely result in changes to existing FY2022 and FY2023 estimates.
I envision the bulk of my investment return from CARR will be from capital appreciation versus dividend income. Given this, I need to be careful as to how much I pay for $1 of EPS because CARR's razor-thin dividend yield will be insufficient to compensate me if CARR's valuation contracts.
In my opinion, a price below $50 seems reasonable.
Carrier Global - Stock Analysis - Final Thoughts
As a UTX shareholder at the time of the April 3, 2020 divestiture of CARR and OTIS, I received shares in both companies; shares are held in a retirement account for which I do not disclose details and in a 'Side' account within the FFJ Portfolio.
I like that CARR is becoming increasingly focused on its core business and am confident the net sale proceeds from the sale of Chubb Fire & Security will be deployed in a manner that will enhance long-term shareholder returns.
I deem my existing exposure to be acceptable and do not plan to acquire additional shares. Were I to consider the purchase of CARR shares, however, I would likely 'pass' since I think CARR's valuation is a tad on the 'rich' side.
Stay safe. Stay focused.
I wish you much success on your journey to financial freedom!
Note: Please send any feedback, corrections, or questions to [email protected].
Disclosure: I am long CARR, OTIS, and RTX.
Disclaimer: I do not know your individual circumstances and do not provide individualized advice or recommendations. I encourage you to make investment decisions by conducting your own research and due diligence. Consult your financial advisor about your specific situation.
I wrote this article myself and it expresses my own opinions. I do not receive compensation for it and have no business relationship with any company mentioned in this article.
