Growth at the heating and cooling systems manufacturer won't be very apparent this year, but patient investors will be well rewarded. By Jacob Sonenshine

Carrier Global's business is cooling down buildings, but its stock is warming up.

The company's German heat-pump business, Viessmann, looks ready to perform better than current forecasts, while onshoring and data center buildouts can spur more growth -- and stock gains.

After dropping 17% since October, Carrier shares have inched 1.5% higher since Feb. 19. That same day, the S&P 500 index peaked, and the Industrial Select Sector SPDR exchange-traded fund began a 4% slide. Carrier shares have held the line through the wreckage.

Risks remain. Carrier's business could get hit by negative economic consequences of tariffs. DeepSeek, the Chinese start-up that says it's creating artificial intelligence software at a fraction of the usual cost, threatens to eventually reduce U.S. software companies' AI investments. That could dent sales for Carrier and peers Trane Technologies and Lennox International, which have been supplying air conditioners to cool data centers.

Carrier has also seen lower sales from Viessmann, which it bought last January. Carrier initially expected more than $4 billion of Viessmann sales last year, but they totaled somewhat over $3 billion. Management forecast flat revenue this year because of uncertainty about who would win Germany's political election, which has implications for heat-pump subsidies.

Analysts reduced Carrier's 2025 sales estimates, which topped $26 billion a year ago, according to FactSet. Estimates now sit $100 million below management's guidance midpoint of $22.75 billion.

Carrier's German headwind, though, is turning into a tailwind. J.P. Morgan Securities analyst Stephen Tusa met with Chief Financial Officer Patrick Goris and writes in a note that "they [management] are not hearing much change on heating laws."

That could spur more customer orders of Viessmann heat pumps. The segment's revenue will be down from a year ago in the first quarter, but Tusa says that revenue could rebound in the second quarter. He upgraded the stock to Overweight from Neutral and raised his price target to $78 from $77.

Supporting that call, Mizuho Securities analyst Brett Linzey writes that heat-pump sales grew 17% in the most recent reported quarter from the prior quarter.

This business has the potential to grow fast because the products are energy-efficient. Businesses buy new heat pumps not only when they invest in new projects, but also as they replace existing equipment. Viessmann accounts for about 15% of total sales.

There's also growth coming from data centers, which technology companies build as they invest in artificial intelligence. Carrier said data center sales should double to $1 billion this year.

Another growth driver for Carrier is "onshoring," as U.S. companies move manufacturing plants here to sidestep disruptive events such as tariffs and the pandemic. The trend began just after Covid and has picked up steam recently.

This type of onshoring spending has aided Carrier's 5% annual sales growth over the past five years -- growth that's above the rate of broader U.S. economic output.

The growth drivers won't be totally apparent this year. Management still forecasts mid-single digit growth, mostly on projected sales of higher-price products especially to its residential customers, which RBC analyst Deane Dray says represents about half of the business. Carrier saw high sales in the fourth quarter because customers bought supplies ahead of tariffs, so for the next few quarters they will order less.

Next year, Carrier can return to volume growth. If the market sees evidence of that trajectory this year, shares prices should rise.

"Let that whole normalization of demand flow though," says Dray. "We really like the stock." Dray rates the stock a Buy, with a $76 price target.

Analysts expect 6% revenue growth to about $24 billion in 2026, which should spark even higher profit growth. The company should continue to buy back stock, including the $3 billion in repurchases slated for this year, and pay down debt with $2.5 billion in expected free cash flow. Analysts forecast 15% earnings per share growth next year.

Such growth should unlock a higher valuation. The stock trades at 22.3 times next 12 months earnings per share, below Lennox International's 25.1 times and Trane Technologies' 27.4. Tusa says if Carrier accelerates growth, "the multiple can absolutely rerate."

Assuming the company demonstrates it is on track to hit the $3.44 in earnings per share that analysts forecast for 2026, the stock would finish this year at about $80, up 19% from Wednesday's close of $66.97.

The main risk is the global economy. If it falls into recession on the back of a trade war, businesses will cut back on purchasing new air conditioning and heating systems. The other risk is a reduction in heat-pump subsidies. Neither risk looks as if it is unfolding right now.

Expect the business to carry the shares higher -- and soon.

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com

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March 28, 2025 21:30 ET (01:30 GMT)

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