Data Center Cooling Momentum Will Offset Residential Weakness And Keep Long Term Prospects Intact

Catalysts

About Carrier Global

Carrier Global provides heating, ventilation, air conditioning, refrigeration and building solutions across residential, commercial, transportation and data center markets.

What are the underlying business or industry changes driving this perspective?

• Although data center cooling orders and backlog extend into 2028 and management targets about US$1b of related sales this year, growth here is increasingly concentrated in a few large hyperscalers and colocation customers. Any pause in project timing could quickly affect Commercial HVAC revenue and applied equipment margins.
• While European residential heat pump sales and subsidy applications in Germany are rising and there is policy support for carbon pricing on heating and transport, overall heating unit volumes in key markets sit near 15 year lows. This may limit near term operating leverage and keep CS Europe margins under pressure if boiler weakness persists longer than expected.
• Even though aftermarket has recorded multiple years of double digit growth with connected chillers up 30% and paid Lynx subscriptions up 40%, the push toward more repair versus replace in residential and light commercial can cap equipment volume recovery. This can weigh on mix and net margins if higher parts revenue only partially offsets lower unit shipments.
• Despite aggressive structural cost actions, including about 3,000 indirect headcount reductions and targeted use of AI tools, the company is still carrying higher inventories in CSA Residential and is accepting under absorption in factories. This can keep segment operating margins volatile until volumes normalize.
• Although management is targeting low single digit organic growth for planning purposes with about 30% conversion and expects roughly US$0.20 of adjusted EPS tailwind in 2026 from restructuring, tax and buybacks, residential demand visibility remains limited. Any prolonged softness in CSA Resi or China RLC could constrain total revenue growth and slow adjusted EPS progression.

Assumptions

How have these above catalysts been quantified?

• This narrative explores a more pessimistic perspective on Carrier Global compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Carrier Global's revenue will grow by 3.7% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 5.9% today to 9.3% in 3 years time.
• The bearish analysts expect earnings to reach $2.3 billion (and earnings per share of $2.95) by about June 2029, up from $1.3 billion today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $3.3 billion.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 27.5x on those 2029 earnings, down from 49.2x today. This future PE is greater than the current PE for the US Building industry at 22.2x.
• The bearish analysts expect the number of shares outstanding to decline by 2.4% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.95%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Data center cooling is becoming a larger part of Commercial HVAC, with sales targeted at about US$1b this year and backlog stretching into 2028. If hyperscaler and colocation customers keep awarding large multi hundred million dollar and US$100 million plus projects, this concentration could lead to stronger growth than expected and push Commercial HVAC revenue and segment earnings above a flat share price view.
• European electrification trends are supportive, with residential heat pump sales in Europe up about 15%, Germany up about 45% and heat pump subsidy applications in Germany expected at about 300,000 alongside the planned ETS2 carbon pricing system. If overall heating units rebound from 15 year lows, Carrier could see improving volumes, mix and margins in CS Europe that lift revenue and net margins above what a flat share price would imply.
• Aftermarket and digital platforms are recording sustained double digit growth, with 12% aftermarket growth in the quarter, connected chillers up 30% and paid Lynx subscriptions up 40% to about 210,000. If this higher margin recurring activity keeps expanding across buildings and transportation, it may steadily raise company wide margins and earnings.
• Commercial HVAC in the Americas has more than doubled in 5 years, with the applied business up 60% in the quarter, aftermarket up mid teens and controls up a little over 20%, and orders outside CSA Resi up low single digits. If this part of the portfolio that is just under 45% of sales with aftermarket continues to grow at double digit rates, it could support higher revenue and operating profit than a flat share price suggests.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Carrier Global is $62.14, which represents up to two standard deviations below the consensus price target of $76.25. This valuation is based on what can be assumed as the expectations of Carrier Global's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $90.0, and the most bearish reporting a price target of just $60.0.
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2029, revenues will be $24.4 billion, earnings will come to $2.3 billion, and it would be trading on a PE ratio of 27.5x, assuming you use a discount rate of 9.0%.
• Given the current share price of $76.0, the analyst price target of $62.14 is 22.3% lower. Despite analysts expecting the underlying business to improve, they seem to believe the market's expectations are too high.
• 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.