Carrier Global does not have the profile of a defensive investment based on the requirements of Ben Graham. The Farm & Heavy Construction Machinery firm may nonetheless be of interest to more risk-oriented investors who have a solid thesis on the company's future growth. At Market Inference, we remain agnostic as to such further developments, and prefer to use a company's past track record as the bellwether for future potential gains.
Carrier Global Is Probably Overvalued
Graham devised the below equation to give investors a quick way of determining whether a stock is trading at a fair multiple of its earnings and its assets:
√(22.5 * 3 year average earnings per share (2.35) * 3 year average book value per share (9.52) = $22.44
After an impressive 39.0% performance over the 12 months, Carrier Global is now trading well over its price because its Graham number is 155.8% above today's share price of $57.39. Even though the stock does not trade at an attractive multiple, it might still meet some of the other criteria for quality stocks that Graham listed in Chapter 14 of The Intelligent Investor.
Positive Retained Earnings From 2019 To 2022, An Acceptable Record Of Dividends, and Some Eps Growth
Ben Graham wrote that an investment in a company with a record of positive retained earnings could contribute significantly to the margin of safety. Carrier Global had positive retained earnings from 2019 to 2022 with an average of $2.59 Billion over this period.
Another one of Graham's requirements is for a 30% or more cumulative growth rate of the company's earnings per share over the last ten 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.
Shareholders of Carrier Global have received regular dividends since 2020. The company has returned a 1.2% dividend yield over the last 12 months.
Negative Current Asset to Liabilities Balance and a Decent Current Ratio
Graham sought companies with extremely low debt levels compared to their assets. For one, he expected their current ratio to be over 2 and their long term debt to net current asset ratio to be near, or ideally under, under 1. Carrier Global fails on both counts with a current ratio of 1.6 and a debt to net current asset ratio of -1.1.
Conclusion
According to Graham's analysis, Carrier Global is likely a company of average quality, which does not offer a significant enough margin of safety for a risk averse investor.
| 2021-02-09 | 2022-02-08 | 2023-02-07 | |
|---|---|---|---|
| Revenue (MM) | $17,456 | $20,613 | $20,421 |
| Gross Margins | 29.3% | 29.0% | 26.8% |
| Operating Margins | 10.7% | 11.4% | 11.8% |
| Net Margins | 11.35% | 8.07% | 17.31% |
| Net Income (MM) | $1,982 | $1,664 | $3,534 |
| Net Interest Expense (MM) | -$288 | -$306 | -$219 |
| Depreciation & Amort. (MM) | -$336 | -$338 | -$380 |
| Earnings Per Share | $2.23 | $1.87 | $2.96 |
| EPS Growth | n/a | -16.14% | 58.29% |
| Diluted Shares (MM) | 890 | 892 | 836 |
| Free Cash Flow (MM) | $2,004 | $2,581 | $2,096 |
| Capital Expenditures (MM) | -$312 | -$344 | -$353 |
| Net Current Assets (MM) | -$9,991 | -$7,671 | -$8,131 |
| Current Ratio | 1.67 | 1.72 | 1.64 |
| Long Term Debt (MM) | $10,036 | $9,513 | $8,702 |
| Net Debt / EBITDA | 4.05 | 4.17 | 1.55 |
