Carrier Global’s 22.3% return over the past six months has outpaced the S&P 500 by 15.1%, and its stock price has climbed to $67.75 per share. This was partly thanks to its solid quarterly results, and the run-up might have investors contemplating their next move.
Is now the time to buy Carrier Global, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Do We Think Carrier Global Will Underperform?
Despite the momentum, we don’t have much confidence in Carrier Global. Here are three reasons we avoid CARR, plus one stock we’d rather own.
1. Core Business Falling Behind as Demand Plateaus
We can better understand HVAC and Water Systems companies by analyzing their organic revenue. This metric gives visibility into Carrier Global’s core business because it excludes one-time events such as mergers, acquisitions, and divestitures along with foreign currency fluctuations - non-fundamental factors that can manipulate the income statement.
Over the last two years, Carrier Global failed to grow its organic revenue. This performance was underwhelming and implies it may need to improve its products, pricing, or go-to-market strategy. It also suggests Carrier Global might have to lean into acquisitions to accelerate growth, which isn’t ideal because M&A can be expensive and risky (integrations often disrupt focus). 
2. EPS Barely Growing
Analyzing the long-term change in earnings per share (EPS) shows whether a company’s incremental sales were profitable — for example, revenue could be inflated through excessive spending on advertising and promotions.
Carrier Global’s EPS grew at 6.9% compounded annual growth rate over the last five years. On the bright side, this performance was better than its 3.7% annualized revenue growth and tells us the company became more profitable on a per-share basis as it expanded.
3. New Investments Fail to Bear Fruit as ROIC Declines
We like to invest in businesses with high returns, but the trend in a company’s ROIC can also be an early indicator of future business quality.
Unfortunately, Carrier Global’s ROIC has decreased significantly over the last few years. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.
Final Judgment
We cheer for all companies making their customers lives easier, but in the case of Carrier Global, we’ll be cheering from the sidelines. With its shares outperforming the market lately, the stock trades at 23.9× forward P/E (or $67.75 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in - we think there are better opportunities elsewhere. We’d recommend looking at one of Charlie Munger’s all-time favorite businesses.
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