{"id":238989,"date":"2025-05-13T00:00:44","date_gmt":"2025-05-13T00:00:44","guid":{"rendered":"https:\/\/peraltafinancing.com\/business\/investing\/carrier-global-risk-profile-is-much-improved\/"},"modified":"2025-05-13T00:00:44","modified_gmt":"2025-05-13T00:00:44","slug":"carrier-global-risk-profile-is-much-improved","status":"publish","type":"post","link":"https:\/\/fivemor.com\/?p=238989","title":{"rendered":"Carrier Global Risk Profile Is Much Improved"},"content":{"rendered":"


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\"Carrier<\/p>\n

I have minimal exposure to Carrier Global Corporation (CARR) and pay virtually no attention to this holding. In fact, my last review was in this August 3, 2021 post<\/a> at which time the most current financial information was for Q2 2021!<\/p>\n

With the release of Q1 2025 results on May 5, 2025 I revisit this holding. While the company’s risk profile is much improved I consider shares to be too richly valued.<\/p>\n

Business Overview<\/strong><\/span><\/h2>\n

CARR operates through 2 business segments<\/a>: Heating, Ventilating and Air Conditioning (HVAC) and Refrigeration.<\/p>\n

The best way to learn about the company is to review its website and Part 1 Item 1 in the most current From 10-K that is accessible through the SEC Filings section<\/a> of the company’s website.<\/p>\n

Financial Results<\/strong><\/span><\/h2>\n

Q1 2025<\/strong><\/span><\/h3>\n

In Q1, CARR had an unfavorable 5% net impact from acquisitions and divestitures and marginal headwind from FX.<\/p>\n

Organic sales were in line with expectations with stronger than expected performance in Climate Solutions Americas. This, however, was partially offset by weaker performance in Climate Solutions, Asia, Middle East and Africa. Europe and Transportation results were as expected.<\/p>\n

Adjusted operating margin expanded by 210 bps YoY. The absence of commercial refrigeration was about a 70 bps tailwind to margin.<\/p>\n

Adjusted EPS of $0.65 was up 27% YoY driven by improved adjusted operating profit, lower net interest expense from deleveraging, and a lower share count.<\/p>\n

Free cash flow (FCF) of $0.42B was also stronger than expected, driven by higher net income, lower than expected seasonal working capital requirements and lower CAPEX.<\/p>\n

\"CARR<\/p>\n

\"CARR<\/p>\n

Operating Cash Flow (OCF), Free Cash Flow (FCF), and CAPEX
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FCF is a non-GAAP metric, and therefore, its method of calculation is inconsistent. Historically, CARR deducts CAPEX from OCF to calculate its FCF. In recent posts, however, I explain my rationale for also deducting share-based compensation (SBC) from a company’s OCF.<\/p>\n

CARR has been undergoing a transformation subsequent to its spin-off from United Technologies (now RTX). This is borne out by wild swings in its annual results.<\/p>\n

The first table below excludes the results from discontinued operations.<\/p>\n

\"CARR<\/p>\n

The following table includes discontinued operations to demonstrate what CARR shareholders have had to put up with in recent years.<\/p>\n

\"CARR<\/p>\n

Now that CARR has undergone an extensive transformation, management anticipates there will be better earnings and FCF stability.<\/p>\n

FY2025 Guidance<\/strong><\/span><\/h2>\n

The following reflects CARR’s most current guidance.<\/p>\n

\"CARR<\/p>\n

\"CARR<\/p>\n

\"CARR<\/p>\n

\"CARR<\/p>\n

CARR has grown its US headcount by ~20% over the past 5 years and continues to invest in its US workforce and factories.<\/p>\n

On the tariff front, virtually all of its imports from Mexico are US MCA compliant.\u00a0Being\u00a0USMCA compliant means that goods meet the rules and requirements set out in the U.S. – Mexico – Canada Agreement. Compliance allows for smooth cross-border trade.<\/p>\n

For the tariffs currently in effect, China is about 80% of CARR’s current US tariff exposure. CARR is fully mitigating its tariff exposure through supply chain and productivity actions with the balance of ~$0.3B being addressed through price increases.<\/p>\n

Based on its strong start to FY2025 and current FX rates, CARR is increasing our full year adjusted EPS guidance.<\/p>\n

Risk Assessment<\/strong><\/span><\/h2>\n

There is a considerable improvement in CARR’s level of risk following my August 3, 2021 post. Its current domestic unsecured long-term credit ratings are:<\/p>\n