CARR Surges 4.5%. Let's Take a Closer Look at its Valuation.

Building Products & Equipment company Carrier Global is standing out today, surging to $39.58 and marking a 4.5% change. In comparison the S&P 500 moved only 2.2%. CARR is -11.5% below its average analyst target price of $44.72, which implies there is more upside for the stock. As such, the average analyst rates it at buy. Over the last year, Carrier Global has underperfomed the S&P 500 by 10.1%, moving -27.5%.

Carrier Global Corporation provides heating, ventilating, and air conditioning (HVAC), refrigeration, fire, security, and building automation technologies worldwide. The company belongs to the industrials sector, which generally includes cyclical companies -- with the exception of conglomerates whose business may span several industries. Cyclical companies experience higher sales during periods of economic expanision, and worsening outlooks during recessions.

Carrier Global's trailing 12 month P/E ratio is 12.6, based on its trailing Eps of $3.14. The company has a forward P/E ratio of 15.6 according to its forward Eps of $2.53 -- which is an estimate of what its earnings will look like in the next quarter.

As of the third quarter of 2022, the average Price to Earnings (P/E) ratio for US industrials companies is 21.46, and the S&P 500 has an average of 15.97. The P/E ratio consists in the stock's share price divided by its earnings per share (Eps), representing how much investors are willing to spend for each dollar of the company's earnings. Earnings are the company's revenues minus the cost of goods sold, overhead, and taxes.

CARR’s price to earnings ratio can be divided by its projected five-year growth rate, to give us the price to earnings, or PEG ratio. This allows us to put its earnings valuation in the context of its growth expectations which is useful because companies with low P/E ratios often have low growth, which means they actually do not present an attractive value.

When we perform the calculation for Carrier Global, we obtain a PEG ratio of 2.08, which indicates that the company is overvalued compared to its growth prospects. The weakness with PEG ratios is that they rely on expected growth estimates, which of course may not turn out as expected.

To gauge the health of Carrier Global's underlying business, let's look at gross profit margins, which are the company's revenue minus the cost of goods only. Analyzing gross profit margins gives us a good picture of the company's pure profit potential and pricing power in its market, unclouded by other factors. As such, it can provide insights into the company's competitive advantages -- or lack thereof.

CARR's gross profit margins have averaged 29.4% over the last four years. While not particularly impressive, this level of margin at least indicates that the basic business model of the company is consistently profitable. These margins are declining based on their four year average gross profit growth rate of -0.5%.

Carrier Global's financial viability can also be assessed through a review of its free cash flow trends. Free cash flow refers to the company's operating cash flows minus its capital expenditures, which are expenses related to the maintenance of fixed assets such as land, infrastructure, and equipment. Over the last four years, the trends have been as follows:

  • 2021 free cash flow: $1,893,000,000.00
  • 2020 free cash flow: $1,380,000,000.00
  • 2019 free cash flow: $1,820,000,000.00
  • 2018 free cash flow: $1,792,000,000.00
  • Average free cash flow: $1,721,250,000.00
  • Average free cash flown growth rate: 4.9 %
  • Coefficient of variability (lower numbers indicating more stability): 13.4 %

With its positive cash flow, the company can not only re-invest in its business, it can offer regular returns to its equity investors in the form of dividends. Over the last 12 months, investors in CARR have received an annualized dividend yield of 1.5% on their capital.

Another valuation metric for analyzing a stock is its Price to Book (P/B) Ratio, which consists in its share price divided by its book value per share. The book value refers to the present liquidation value of the company, as if it sold all of its assets and paid off all debts.

Carrier Global's P/B ratio indicates that the market value of the company exceeds its book value by a factor of 5, so the company's assets may be overvalued compared to the average P/B ratio of the Industrials sector, which stands at 3.7 as of the third quarter of 2022.

Carrier Global is by most measures undervalued because it has a very low P/E ratio, an elevated P/B ratio, and a steady stream of strong cash flows with an upwards trend. The stock has mixed growth indicators because it has a an above average PEG ratio and consistently average gross margins that are stable. We hope you enjoyed this overview of CARR's fundamentals. Make sure to subscribe to our free newsletter for daily equity reports.

The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.