Carrier Global

Carrier Global reported 3% organic growth to $6.4 billion, but operating margins contracted 190 basis points to 17.2%, and adjusted EPS fell 7% to $0.86 on weaker product mix and additional investments in the business.

Why it matters: Carrier posted backlog and order growth that were quite impressive and increased 2026 revenue guidance to $23 billion (up 4.5%) and EPS to $2.90 (up 3.5%). However, the impact of adverse mix on margins likely caused shares to trade off nearly 5% intraday July 28. The core Americas business saw tremendous commercial order growth though sales declined on customer delivery timing. The company also saw very encouraging double-digit growth in residential & light commercial, though higher new build business also weighed on margins. Europe experienced similar dynamics to Americas but on a more muted basis (residential improving but outweighed by commercial weakness and mix). APAC Middle East saw tremendous growth ex-China, but China residential was a significant margin drag and an increasing area of management concern.

Big picture: The order book bodes quite well for future growth. Orders increased 40%, commercial HVAC was up 65%, and data center orders more than tripled. Of the $1 billion increase to guidance, half was attributable to data centers. Management is increasing capacity in the US and India to meet demand.

The bottom line: We are increasing our fair value estimate for narrow-moat Carrier Global to $77 per share from $73 on the modest guidance boost and the time value of money, and we are decreasing our Morningstar Uncertainty Rating to Medium as concerns over Carrier’s residential exposure abate. Despite improving residential and huge tailwinds in commercial, elevated margin uncertainty was not helpful in investors’ eyes.

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Our $77 per share fair value estimate equates to about 28 times management’s still subdued 2026 EPS, which is reasonable in historical context. Management boosted its guidance for 2026, citing signs of recovery in North American residential after a prolonged weak period as well as booming commercial HVAC orders underpinned by data center demand. We believe the company's new long-term guidance at its 2025 investor day is credible. Having reshaped the portfolio to focus on global HVAC and refrigeration, management is now targeting top-line growth of 6%-8% and margin expansion, driven by low-single-digit underlying market growth, an improved product mix, and increased aftermarket/services penetration.

We model 9% revenue CAGR for the North American climate business with gradual margin improvement to 23%, which reflects Carrier’s No. 1 market position and progress on aftermarket. In Europe, we model 7% revenue CAGR and gradual 600 basis points of margin expansion to 15%, believing management can execute on its plan. Given the historical mispricing of contracts at Viessmann and the realization of synergies with Carrier, we believe this is achievable. In Asia, we forecast 6% revenue CAGR reflecting some conservatism given the company’s comparatively smaller scale in Asia versus other markets. Per management guidance, especially with the robustness of the aftermarket opportunity, we forecast gradual margin expansion to 14%. For transportation, we forecast 5% revenue CAGR and 50 basis points of annual margin expansion, consistent with management’s plan. Given the various corporate actions taken to focus the business, now is the time for management to execute, particularly on aftermarket attach rates and margin expansion. Given the CEO’s track record of success elsewhere and evidence of similar performance across the peer group, we find these estimates to be credible.

With modest capital requirements of capital expenditures at 2% of sales and research and development at approximately 3% of sales, we anticipate Carrier to generate healthy free cash flow and deleverage rapidly.

Our Stage II forecast period incorporates an estimated investment rate of 28%, an earnings before interest growth rate of 7%, and perpetual growth of 3%. An 8.3% weighted average cost of capital is derived from the market-average cost of equity and the firm’s current capital structure.

We assign Carrier a narrow economic moat rating, supported by intangible assets and customer switching costs. There are relatively few companies in the US commercial HVAC space, and the market for large, complex HVAC systems (known as “applied” HVAC systems) is the most consolidated. Four players—Trane, Johnson Controls, Carrier, and Daikin—dominate the US applied HVAC market. Carrier is the third-largest firm in the US commercial market, behind Trane and Johnson Controls. The US light commercial HVAC market is more competitive than the applied market but remains relatively consolidated; we estimate that Carrier, Trane, Bosch (York brand from Johnson Controls), and Lennox account for over two-thirds of the US light commercial market, with Carrier as the market leader. Global commercial HVAC competition is more intense than in the US market, particularly in Asian markets, where Daikin, Midea, Gree, Mitsubishi Electric, and LG Electronics are major competitors. However, these firms primarily focus on ductless residential and light-commercial systems.

Carrier’s technological know-how and service capabilities are key differentiators in global commercial HVAC, especially for large, complex projects. Over the years, these differentiators have allowed the firm to build a large installed base, which can have long useful lives (up to 40 years for applied HVAC systems). An installed base of commercial HVAC systems is an important asset that can generate recurring revenue over the systems' lifetimes. Given the mission-critical nature of commercial building systems, maintenance, service, and aftermarket parts are needed to avoid disruptive and costly system breakdowns.

New commercial HVAC systems require significant upfront investment and installation time but have long lifecycles. The OEMs tend to maintain direct salesforces for these solutions, and the sales personnel tend to be engineers as opposed to HVAC contractors, given the scale and complexity of the solutions. As such, we believe building operators would be reluctant to replace entire systems and instead prefer to retrofit existing systems to adapt to evolving technologies, regulatory standards, and user requirements. This is a favorable dynamic for Carrier, which is well-positioned to capture incremental retrofit revenue in addition to unplanned service and routine maintenance revenue.

That said, the ability to capture future service revenue from an installed base is not guaranteed, especially for less sophisticated systems. We believe third-party service companies can generally service many of Carrier’s products, and some customers have internal engineers who can service systems to a certain extent. However, third-party or internal service engineers would still need to purchase aftermarket parts from the incumbent manufacturer for many projects. While Carrier is one of the leading players in the global commercial HVAC market, it nonetheless fiercely competes with formidable rivals that keep pricing power in check. While Trane, Carrier, and Johnson Controls have relative strengths and weaknesses, we don’t see significant differentiation among the three in the commercial HVAC space. All the major players consistently innovate, particularly now with digital solutions.

The US residential HVAC market is more competitive than the commercial market, and pricing power accrues to firms that enjoy strong brand familiarity and quality ratings. Carrier is a top performer. Based on industry data, the average price of Carrier units can be 15-30% higher than industry average. Carrier’s lower-end brands, such as Bryant, Payne, and Heil, have less pricing power but allow the company to further segment the market. Carrier’s US residential product portfolio, which has a leading US market share (likely approaching 20%), has strong enough brand equity/pricing power to support a narrow moat for the firm’s US residential HVAC business.

We don't believe the switching-cost moat in commercial HVAC extends to the residential HVAC market, as residential replacement costs are lower. Depending on the type of repair needed (for example, compressor replacement), purchasing a new HVAC unit is often preferred. As the residential HVAC service market is third-party operated, OEMs have limited aftermarket service opportunities. However, customer retention in residential is reasonably high.

Carrier's Transicold brand, along with Trane’s Thermo-King brand, largely control the US truck and trailer refrigeration market. Carrier has a long-standing reputation for dependability and continued innovation that helps customers lower operating costs and prevent costly damage claims. For example, more energy-efficient and lighter trailer refrigeration units reduce fuel consumption and increase cargo capacity. Carrier also offers customer service and maintenance programs through a robust nationwide dealer network, which can prevent downtime. Using multiple suppliers for a trucking fleet would lead to cost inefficiencies in purchasing power and maintenance expenses. As such, we believe Carrier enjoys long-standing relationships with trucking customers.

Despite few competitors in the truck and trailer refrigeration market, the industry is cyclical, with Carrier’s market opportunity skewed toward new trucks and trailers and third-party dealers capturing a share of service revenue. That said, Carrier’s improved parts capture rate and digital offerings have expanded the firm’s aftermarket opportunity. However, we estimate that approximately 40% of segment revenue is attributable to international truck and trailer markets that we consider more competitive than the North American market. Furthermore, the remaining 30% of segment revenue comes from other applications, such as refrigerated marine containers and sensors, which we also see as more competitive. As such, we believe a narrow economic moat is the appropriate rating for the segment.

The company achieves more dominant share, especially in commercial solutions, closing its gap with Johnson Controls and Trane.

Services/aftermarket attach rates grow above management’s double-digit target and further enhance returns.

Viessmann synergies exceed expectations.

Pricing power erodes due to insufficient product differentiation.

Independent third parties capture more of the aftermarket/service opportunity.

Viessmann underperforms, resulting in write-downs/value destruction.