Carrier Global (CARR)

Heating, ventilation, air conditioning, and refrigeration company Carrier Global (NYSE:CARR) met Wall Street’s revenue expectations in Q1 CY2025, but sales fell by 3.7% year on year to $5.22 billion. The company’s full-year revenue guidance of $23 billion at the midpoint came in 1.5% above analysts’ estimates. Its non-GAAP profit of $0.65 per share was 11.3% above analysts’ consensus estimates.

Company Overview

Founded by the inventor of air conditioning, Carrier Global (NYSE:CARR) manufactures heating, ventilation, air conditioning, and refrigeration products.

Many HVAC and water systems companies sell essential, non-discretionary infrastructure for buildings. Since the useful lives of these water heaters and vents are fairly standard, these companies have a portion of predictable replacement revenue. In the last decade, trends in energy efficiency and clean water are driving innovation that is leading to incremental demand. On the other hand, new installations for these companies are at the whim of residential and commercial construction volumes, which tend to be cyclical and can be impacted heavily by economic factors such as interest rates.

Other companies offering HVAC or refrigeration solutions include Trane Technologies (NYSE:TT), Johnson Controls International, (NYSE:JCI), and Lennox International (NYSE:LII)

Examining a company’s long-term performance can provide clues about its quality. Any business can have short-term success, but a top-tier one grows for years. Unfortunately, Carrier Global’s 4.2% annualized revenue growth over the last five years was sluggish. This fell short of our benchmark for the industrials sector and is a tough starting point for our analysis.

Long-term growth is the most important, but within industrials, a half-decade historical view may miss new industry trends or demand cycles. Carrier Global’s annualized revenue growth of 4.8% over the last two years aligns with its five-year trend, suggesting its demand was consistently weak.

Carrier Global also reports organic revenue, which strips out one-time events like acquisitions and currency fluctuations that don’t accurately reflect its fundamentals. Over the last two years, Carrier Global’s organic revenue averaged 2.6% year-on-year growth. Because this number is lower than its normal revenue growth, we can see that some mixture of acquisitions and foreign exchange rates boosted its headline results.

This quarter, Carrier Global reported a rather uninspiring 3.7% year-on-year revenue decline to $5.22 billion of revenue, in line with Wall Street’s estimates.

Looking ahead, sell-side analysts expect revenue to grow 3.2% over the next 12 months, a slight deceleration versus the last two years. This projection doesn't excite us and implies its products and services will face some demand challenges.

All else equal, we prefer higher gross margins because they usually indicate that a company sells more differentiated products and commands stronger pricing power.

Carrier Global has bad unit economics for an industrials company, giving it less room to reinvest and develop new offerings. As you can see below, it averaged a 25.9% gross margin over the last five years. Said differently, Carrier Global had to pay a chunky $74.07 to its suppliers for every $100 in revenue.

Carrier Global produced a 27.7% gross profit margin in Q1, marking a 10.1 percentage point increase from 17.6% in the same quarter last year. Carrier Global’s full-year margin has also been trending up over the past 12 months, increasing by 2.5 percentage points. If this move continues, it could suggest better unit economics due to some combination of stable to improving pricing power and input costs (such as raw materials).

Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses – everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.

Carrier Global has been an efficient company over the last five years. It was one of the more profitable businesses in the industrials sector, boasting an average operating margin of 15.2%. This result was particularly impressive because of its low gross margin, which is mostly a factor of what it sells and takes huge shifts to move meaningfully. Companies have more control over their operating margins, and it’s a show of well-managed operations if they’re high when gross margins are low.

Looking at the trend in its profitability, Carrier Global’s operating margin decreased by 5.3 percentage points over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability.

This quarter, Carrier Global generated an operating profit margin of 12.1%, up 5 percentage points year on year. Since its gross margin expanded more than its operating margin, we can infer that leverage on its cost of sales was the primary driver behind the recently higher efficiency.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Carrier Global’s EPS grew at a weak 2.8% compounded annual growth rate over the last five years, lower than its 4.2% annualized revenue growth. This tells us the company became less profitable on a per-share basis as it expanded.

We can take a deeper look into Carrier Global’s earnings to better understand the drivers of its performance. As we mentioned earlier, Carrier Global’s operating margin improved this quarter but declined by 5.3 percentage points over the last five years. Its share count also grew by 1.4%, meaning the company not only became less efficient with its operating expenses but also diluted its shareholders.

Like with revenue, we analyze EPS over a shorter period to see if we are missing a change in the business.

For Carrier Global, its two-year annual EPS growth of 10.2% was higher than its five-year trend. This acceleration made it one of the faster-growing industrials companies in recent history.

In Q1, Carrier Global reported EPS at $0.65, up from $0.51 in the same quarter last year. This print easily cleared analysts’ estimates, and shareholders should be content with the results. Over the next 12 months, Wall Street expects Carrier Global’s full-year EPS of $2.70 to grow 13.6%.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

Carrier Global has shown decent cash profitability, giving it some flexibility to reinvest or return capital to investors. The company’s free cash flow margin averaged 7.2% over the last five years, slightly better than the broader industrials sector.

Taking a step back, we can see that Carrier Global’s margin dropped by 5.9 percentage points during that time. Continued declines could signal it is in the middle of an investment cycle.

Carrier Global’s free cash flow clocked in at $420 million in Q1, equivalent to a 8% margin. Its cash flow turned positive after being negative in the same quarter last year, but we wouldn’t read too much into the short term because investment needs can be seasonal, leading to temporary swings. Long-term trends trump fluctuations.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Although Carrier Global hasn’t been the highest-quality company lately because of its poor revenue and EPS performance, it historically found a few growth initiatives that worked out well. Its five-year average ROIC was 17.2%, impressive for an industrials business.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, Carrier Global’s ROIC has decreased significantly over the last few years. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.

Carrier Global reported $1.7 billion of cash and $11.62 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $4.48 billion of EBITDA over the last 12 months, we view Carrier Global’s 2.2× net-debt-to-EBITDA ratio as safe. We also see its $239 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

The company beat EPS expectations pretty convincingly this quarter. It was also great to see Carrier Global’s full-year revenue and EPS guidance top analysts’ expectations after being raised. Overall, this quarter had some key positives. The stock traded up 5% to $65.60 immediately after reporting.

Updated: June 23, 2025 at 11:09 PM EDT

Before making an investment decision, investors should account for Carrier Global’s business fundamentals and valuation in addition to what happened in the latest quarter.

Carrier Global isn’t a terrible business, but it doesn’t pass our bar. To begin with, its revenue growth was uninspiring over the last five years, and analysts don’t see anything changing over the next 12 months. And while its impressive operating margins show it has a highly efficient business model, the downside is its diminishing returns show management's prior bets haven't worked out. On top of that, its declining operating margin shows the business has become less efficient.

Carrier Global’s P/E ratio based on the next 12 months is 23.4x. This multiple tells us a lot of good news is priced in - we think there are better stocks to buy right now.