Shares of Carrier Global (CARR) rose in a down market Monday as J.P. Morgan analyst Stephen Tusa initiated coverage on the major climate systems maker’s stock with a buy rating.
Carrier was spun off from United Technologies last month, ahead of United Tech's April merger with Raytheon (RTN) - Get Report.. Tusa sees Carrier as undervalued compared to its peers, he wrote in a report cited by Barron’s.
"The stock is cheap at 10 times trough EPS, the only one in the sector at that level, with a discount (65%) versus directly comparable peers rarely seen, the basis for our view that the stock could double over the next 12 months,” Tusa wrote.
"In the end, management has some wood to chop, but we see this type of valuation for this type of franchise as a once-in-a-generation opportunity."
Carrier has a trailing price-earnings ratio of 6.77 and a forward P-E of 9.81, according to Morningstar.
As for its competitors, Trane Technologies (TT), formerly Ingersoll Rand, has a trailing P-E ratio of 16.03 and a forward P-E of 20.88, and Lennox International LII has a trailing P-E ratio of 17.71 and a forward P-E of 17.45.
Tusa acknowledges that Carrier's balance sheet is "stretched," but doesn't view that as a risk for now. Eventually "something needs to happen” on this front, perhaps an equity offering, he said. Divestitures are “the best solution” to knock down the company’s hefty debt burden, he said.
Tusa has a $20 price target for Carrier shares, which recently traded at $14.52, up 5.64%. The stock is up 21% since it went public March 19.