Johnson Controls (JCI) Investor Day Raises Hopes: Hold the Stock

In recent years, there has been a noticeable shift towards a cleaner and more efficient energy ecosystem, with smart building technology gaining traction. As America strives for net-zero emissions, homeowners are focusing on converting their existing homes into more energy-efficient ecosystems. Smart homes are designed to make the most of the available energy and reduce the total energy consumption of households. Increasing adoption of smart home technologies will constantly increase the space. According to Fortune Business Insights, the global market size for smart buildings was $57.3 billion in 2020 and is expected to reach $265.4 billion by 2028, growing at a CAGR of 21.6% over the 2021-2028 period.

Since smart buildings are the way forward, in this article we will discuss why it would be a wise decision to keep Johnson Controls International JCI now in your wallet. The company, one of the leading providers of smart building solutions, held its investor day yesterday and set three-year financial targets. Before we delve deeper into the objectives, let’s take a look at the factors that will determine the company’s prospects.

Business drivers

Johnson Controls believes that raising regulatory standards regarding building efficiency and carbon neutrality targets will provide it with ample growth opportunities. This diversified technology company — which provides building systems including HVAC (heating, ventilation and air conditioning) & controls and security and safety products — estimates its current total addressable market at $300 billion. Amid the rising trends of decarbonization, healthy and smart buildings, the company expects incremental market revenue of $250 billion over the next decade.

Johnson Controls’ global HVAC systems, with strong exposure to commercial buildings rather than the residential market, are positioning well as commercial buildings reopen, with Americans returning to work and entering offices. Accumulated spending on commercial HVAC will boost the company’s revenues going forward. With buildings accounting for approximately 40% of global greenhouse gas emissions and large-scale investment in decarbonization increasing, growth opportunities in net-zero building requirements will be a key business driver for the company.

Rising demand for home automation and security also bodes well for Johnson Controls. Home automation and security made a big leap last year. Wellness, usability, entertainment and safety will continue to power this space. From programmable thermostats to security cameras, video doorbells, wireless home security systems and multi-zone HVAC (heating, ventilation and air conditioning) systems, consumers are using technologies that can control the microclimate in their home.

What do we like about JCI?

Johnson Controls provides customers with world-class technologies through strong complementary brands and channels. The acquisitions of Synchrony, EasyIO BEMS product line, Qolsys and Silent-Aire have boosted Johnson Controls’ prospects and service offering. The partnership with Microsoft to build a comprehensive digital twin platform that supports the entire ecosystem of a building also holds great promise. The partnership with Pelion enables Johnson Controls to bring connected intelligence to all operational technologies. Alliance with DigiCert to provide customers with the most advanced and trusted connectivity for smart building technology also bodes well.

The launch of OpenBlue, the company’s newest digital platform, is likely to boost sales going forward. Digital integration of OpenBlue with key Johnson Controls building systems will optimize the performance of the entire HVAC system, making shared spaces safer and more sustainable. The company’s latest offering under the OpenBlue platform, Net Zero Buildings as a Service, which includes a full portfolio of tailor-made sustainability products for various segments, provides ample growth visibility. Johnson Controls’ ambitious set of new ESG commitments — including the goal of achieving net-zero carbon emissions by 2040 with new OpenBlue digital products and services — are truly commendable.

We appreciate the company’s strong balance sheet and investor-friendly moves. Its low leverage (of about 29%) gives it more financial flexibility. During its fiscal third quarter, the company completed its 2021 fiscal target of $1 billion in share repurchases and expects an incremental $250 million share repurchase in the fiscal fourth quarter.

Encouragingly, Johnson Controls has planned 150 new product launches for fiscal year 2021, which are expected to boost the revenue pipeline. It also confirmed its fiscal fourth quarter and 2021 guidance yesterday. The company expects 2021 adjusted EPS from $2.64 to $2.66 for 2021, indicating 18-19% year-over-year growth. Organic sales are expected to grow year-over-year in 2021 with medium-single digit growth.

Impressive three-year targets

The fiscal targets for 2022-2024 are intended to boost confidence in the stock. Enhanced digitalization and integrated solutions, recovery in non-residential markets, growth driven by ESG trends (including sustainability and higher efficiency, decarb and net zero), and technological developments (related to IoT, Cloud and edge intelligence) will be key growth drivers.

Johnson Controls expects sales to see a CAGR of 6-7% over the stated period amid secular trends and accelerated growth in services and products. Earnings are expected to be a CAGR of 18-21%, driven by rising revenues, margin expansion and capital deployment. EBITDA margin expansion of 250-300 basis points is projected, thanks to an aggressive productivity program and a solid focus on cost discipline, which would lead to reductions in SG&A costs (savings of $200 million) and COGS (savings of $300 million ). It plans to deploy $8 billion in capital through attractive dividends, share repurchases, mergers and acquisitions and organic reinvestments. On an encouraging note, this Zacks Rank #3 (Hold) company – which includes colleagues: Residence Technologies REZI, Allegion PLC Alone Smart living at home VVNT — expects free cash flow to be 100% of adjusted net income. You can see the full list of current Zacks #1 Rank (Strong Buy) stocks here

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