Integration Of Viessmann Climate Solutions Will Improve Margins Through Cost Synergies By 2026

Key Takeaways

• Carrier's strategic investments and acquisitions enhance growth in key sectors and improve margins through service expansion and cost synergies.
  
• Focus on sustainable solutions and significant share repurchases is set to boost future revenue streams and earnings per share.
  
• Ongoing integration challenges, market weaknesses, and reliance on subsidies create uncertainties, potentially impacting Carrier's short-term margins and long-term growth prospects.

Catalysts

Provides heating, ventilating, and air conditioning (HVAC), refrigeration, fire, security, and building automation technologies in the United States, Europe, the Asia Pacific, and internationally.

• Carrier Global's organic orders increased by over 20% year-over-year, enhancing their backlog and positioning the company for continued revenue growth into 2025.
  
• The company is experiencing enhanced growth in key verticals like data centers, leading to aftermarket growth opportunities, which are expected to improve net margins and revenue through services.
  
• Carrier is set to repurchase approximately $5 billion worth of shares between the second half of this year and the end of next year, which is expected to significantly boost earnings per share.
  
• The integration of Viessmann Climate Solutions is projected to yield over $200 million in cost synergies by 2026, positively impacting net margins.
  
• Carrier’s focus on reducing customers' carbon emissions through innovative solutions, such as scalable global platforms and embedded software, aligns with sustainability trends, potentially expanding future revenue streams.

Carrier Global Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Carrier Global's revenue will grow by 1.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.2% today to 11.3% in 3 years time.
• Analysts expect earnings to reach $2.9 billion (and earnings per share of $3.47) by about December 2027, up from $1.5 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $2.2 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 29.4x on those 2027 earnings, down from 43.1x today. This future PE is greater than the current PE for the US Building industry at 22.1x.
• Analysts expect the number of shares outstanding to decline by 2.16% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.66%, as per the Simply Wall St company report.

Carrier Global Future Earnings Per Share Growth

Risks

• The ongoing integration challenges and financial complexities from exiting various segments, like Fire & Security, might create short-term uncertainties for Carrier, impacting both net margins and overall earnings stability.
  
• Weakness in the residential and light commercial HVAC markets in Europe and China poses a risk, potentially suppressing revenue growth and profit margins in these regions.
  
• The Viessmann Climate Solutions acquisition, while strategically beneficial, brings integration risks and potential margin dilution, especially with the expected significant cost synergies not fully realized until 2026, affecting net earnings in the interim.
  
• Carrier's reliance on favorable governmental policies, such as subsidies for heat pumps in Europe, introduces a risk to revenue if these subsidies are reduced or delayed.
  
• The expected benefits from the aftermarket strategy require continued investment and execution, thus presenting a risk if these expectations are not met, potentially impacting revenue and profitability projections long-term.

Valuation

• The analysts have a consensus price target of $81.88 for Carrier Global based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $95.0, and the most bearish reporting a price target of just $53.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $25.8 billion, earnings will come to $2.9 billion, and it would be trading on a PE ratio of 29.4x, assuming you use a discount rate of 7.7%.
• Given the current share price of $73.7, the analyst's price target of $81.88 is 10.0% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.