Stock Story -
Heating, ventilation, air conditioning, and refrigeration company Carrier Global (NYSE:CARR) fell short of the market’s revenue expectations in Q3 CY2024 as sales rose 4.4% year on year to $5.98 billion. The company’s full-year revenue guidance of $22.5 billion at the midpoint also came in 11.3% below analysts’ estimates. Its non-GAAP profit of $0.77 per share was also 5.9% below analysts’ consensus estimates.
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Carrier Global (CARR) Q3 CY2024 Highlights:
- Revenue: $5.98 billion vs analyst estimates of $6.56 billion (8.7% miss)
- Adjusted EPS: $0.77 vs analyst expectations of $0.82 (5.9% miss)
- EBITDA: $1.05 billion vs analyst estimates of $1.38 billion (24% miss)
- The company dropped its revenue guidance for the full year to $22.5 billion at the midpoint from $25.5 billion, a 11.8% decrease
- Management lowered its full-year Adjusted EPS guidance to $2.50 at the midpoint, a 12.3% decrease
- Gross Margin (GAAP): 28%, down from 31.7% in the same quarter last year
- Operating Margin: 12.8%, up from 11.3% in the same quarter last year
- EBITDA Margin: 17.6%, down from 19.9% in the same quarter last year
- Free Cash Flow was -$356 million, down from $949 million in the same quarter last year
- Organic Revenue rose 4% year on year (3% in the same quarter last year)
- Market Capitalization: $72.18 billion
Company OverviewFounded by the inventor of air conditioning, Carrier Global (NYSE:CARR) manufactures heating, ventilation, air conditioning, and refrigeration products.
HVAC and Water Systems
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.Sales Growth
Examining a company’s long-term performance can provide clues about its business quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Unfortunately, Carrier Global’s 4.5% annualized revenue growth over the last five years was sluggish. This shows it failed to expand in any major way and is a rough starting point for our analysis.We at StockStory place the most emphasis on long-term growth, but within industrials, a half-decade historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. Carrier Global’s annualized revenue growth of 8.2% over the last two years is above its five-year trend, suggesting some bright spots.
Carrier Global also reports organic revenue, which strips out one-time events like acquisitions and currency fluctuations because they don’t accurately reflect its fundamentals. Over the last two years, Carrier Global’s organic revenue averaged 3.3% 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 performance.
This quarter, Carrier Global’s revenue grew 4.4% year on year to $5.98 billion, falling short of Wall Street’s estimates.
Looking ahead, sell-side analysts expect revenue to grow 5.7% over the next 12 months, a slight deceleration versus the last two years. This projection is underwhelming and indicates the market thinks its products and services will face some demand challenges.
Operating Margin
Carrier Global has been a well-oiled machine over the last five years. It demonstrated elite profitability for an industrials business, boasting an average operating margin of 17.4%. 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.Analyzing the trend in its profitability, Carrier Global’s annual operating margin rose by 9.4 percentage points over the last five years, showing its efficiency has meaningfully improved.
In Q3, Carrier Global generated an operating profit margin of 12.8%, up 1.5 percentage points year on year. The increase was encouraging, and since its gross margin actually decreased, we can assume it was recently more efficient because its operating expenses like marketing, R&D, and administrative overhead grew slower than its revenue.
Earnings Per Share
Analyzing long-term revenue trends tells us about a company’s historical growth, but the long-term change in its 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 2.9% compounded annual growth rate over the last five years, lower than its 4.5% annualized revenue growth. However, its operating margin actually expanded during this timeframe, telling us non-fundamental factors affected its ultimate earnings.
We can take a deeper look into Carrier Global’s earnings to better understand the drivers of its performance. Carrier Global recently raised equity capital, and in the process, grew its share count by 5.6% over the last five years. This has resulted in muted earnings per share growth but doesn’t tell us as much about its future. We prefer to look at operating and free cash flow margins in these situations.
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 8.1% was higher than its five-year trend. Accelerating earnings growth is almost always an encouraging data point.
In Q3, Carrier Global reported EPS at $0.77, down from $0.89 in the same quarter last year. This print missed analysts’ estimates. Over the next 12 months, Wall Street expects Carrier Global’s full-year EPS of $2.78 to grow by 11.8%.