Carrier Global is currently trading at $43.08 per share and has a Graham number of $24.25, which implies that it is 77.65% above its fair value. We calculate the Graham number as follows:
√(22.5 * 5 year average earnings per share * book value per share) = √(22.5 * 2.81 * 9.3) = 24.25
The Graham number is one of seven factors that Graham enumerates in Chapter 14 of The Intelligent Investor for determining whether a stock offers a margin of safety. Rather than use the Graham number by itself, its best to consider it alongside the following fundamental metrics:
Sales Revenue Should Be No Less Than $500 million
For Carrier Global, average sales revenue over the last 3 years has been $20,181,000,000, so in the context of the Graham analysis the stock has impressive sales revenue. Originally the threshold was $100 million, but since the book was published in the 1970s it's necessary to adjust the figure for inflation.
Current Assets Should Be at Least Twice Current Liabilities
We calculate Carrier Global's current ratio by dividing its total current assets of $9,879,000,000 by its total current liabilities of $6,032,000,000. Current assets refer to company assets that can be transferred into cash within one year, such as accounts receivable, inventory, and liquid financial instruments. Current liabilities, on the other hand, refer to those that will come due within one year. Carrier Global’s current assets outweigh its current liabilities by a factor of 1.64 only.
The Company’s Long-term Debt Should Not Exceed its Net Current Assets
This means that its ratio of debt to net current assets should be 1 or less. Since Carrier Global’s debt ratio is 2.3, the company has too much debt. We calculate Carrier Global’s debt to net current assets ratio by dividing its total long term of debt of $8,842,000,000 by its current assets minus total current liabilities.
The Stock Should Have a Positive Level of Retained Earnings Over Several Years
Carrier Global had positive retained earnings from 2019 to 2022 with an average of $2,593,500,000. Retained earnings are the sum of the current and previous reporting periods' net asset amounts, minus all dividend payments. It's a similar metric to free cash flow, with the difference that retained earnings are accounted for on an accrual basis.
There Should Be a Record of Uninterrupted Dividend Payments Over the Last 20 Years
Carrier Global has offered a regular dividend since at least 2020. The company has returned a 1.6% dividend yield over the last 12 months.
A Minimum Increase of at Least One-third in Earnings per Share (EPS) Over the Past 10 Years
During the 5 years for which we have data, Carrier Global's earnings per share grew at a rate of 29.75% — which doesn't meet Graham's requirements for duration or magnitude of growth. Nonetheless, the increase of $3.16 EPS in 2018 to a reported $4.10 EPS in 2022 is respectable by most standards.
It may have positive retained earnings, EPS growth, and a decent dividend, but Carrier Global does not have the profile of a defensive stock according to Benjamin Graham's criteria because it is has too much debt and is overvalued in terms of assets and earnings.
