Leveraging AI And Renewable Energy Innovations To Propel Growth And Diversify Revenue Streams

Key Takeaways

• Investments in AI and connectivity signify a shift towards efficiency and recurring revenue models, promising operational improvements and stable growth.
  
• Streamlining operations by divesting non-core businesses and focusing on sustainable solutions aligns with market trends and could positively impact revenue growth.
  
• Acquisition risks, supply chain issues, and changing market dynamics could significantly affect revenue, profitability, and strategic goals.

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.

• The introduction of AI center of excellence and advancements in generative AI for real-time and proactive chiller maintenance services could increase operational efficiency and improve service margins, enhancing net margins.
  
• Significant investment in connectivity, including expanding the number of connected chillers and paid subscriptions for monitoring platforms, indicates a shift towards more recurring revenue models, potentially improving revenue stability and growth.
  
• The divestitures of non-core businesses and a focus on higher-growth, sustainable solutions like low GWP chillers and heat pumps are streamlining operations and focusing on sectors with strong secular tailwinds, likely to positively impact revenue growth.
  
• Multi-billion dollar share buyback program signals strong free cash flow and confidence in future earnings growth, which could positively influence earnings per share (EPS).
  
• Entry into battery energy storage systems with expanded capacity targets a new market segment, enhancing addressable market and contributing to diversification of revenue streams, potentially increasing overall revenues.

Assumptions

• Analysts are assuming Carrier Global's revenue will grow by 3.7% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 14.3% today to 10.4% in 3 years time.
• Analysts expect earnings to reach $2.8 billion (and earnings per share of $3.33) by about August 2027, down from $3.4 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $3.2 billion in earnings, and the most bearish expecting $2.1 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 35.8x on those 2027 earnings, up from 18.3x today. This future PE is greater than the current PE for the US Building industry at 20.7x.
• Analysts expect the number of shares outstanding to grow by 7.77% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 7.51%, as per the Simply Wall St company report.

Risks

• Execution and integration risks with Viessmann Climate Solutions acquisition could impact the expected synergies and margin improvements.
  
• The downturn in solar PV sales and weaker residential market in Europe, particularly in Germany, could negatively affect revenue and profitability in the VCS segment.
  
• Supply chain and manufacturing challenges, especially in regions like China, could lead to disruptions, impacting revenue and margins in affected business units.
  
• Dependence on the seasonal upturn in heating months for sales recovery in Europe might not materialize as expected, affecting revenue projections.
  
• Competition and market dynamics, including potential supply issues among competitors and shifting customer preferences, could impact market share and pricing power, potentially affecting revenue and earnings.

Valuation

• The analysts have a consensus price target of $70.4 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 $81.0, 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 $26.4 billion, earnings will come to $2.8 billion, and it would be trading on a PE ratio of 35.8x, assuming you use a discount rate of 7.5%.
  
• Given the current share price of $68.64, the analyst's price target of $70.4 is 2.5% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.