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

Over the past few years, there has been a conspicuous shift toward a cleaner and more efficient energy ecosystem, with smart building technology gaining momentum. While America races to achieve net-zero emission, homeowners are focusing on converting their existing homes to more energy-efficient ecosystems. Smart homes are designed to make the most of available energy and decrease overall household energy consumption. Increasing adoption of smart home technologies will constantly boost the space. Per Fortune Business Insights, the global smart building market size was $57.3 billion in 2020 and is expected to reach $265.4 billion in 2028, at a CAGR of 21.6% during the 2021-2028 period.

With smart buildings being the way forward, we shall discuss in this writeup why it would be a wise decision to retain Johnson Controls International JCI in your portfolio now. The company, one of the leading smart buildings solution providers, held its investor day yesterday and set out three-year financial targets. Before delving into its targets, let’s take a look at the factors that will drive the company’s prospects.

Business Drivers

Johnson Controls believes that increasing regulatory norms related to building efficiency and carbon neutrality targets will offer it 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 to be valued at $300 billion. Amid the rising trends of decarbonization, healthy and smart buildings, the company expects a $250 billion incremental market revenue opportunity over the next decade.

Johnson Controls’ global HVAC systems, with heavy exposure to commercial buildings rather than the residential market, positions it well as commercial buildings are reopening, with Americans heading back to work and into offices. Pent-up spending on commercial HVAC will buoy the company’s revenues, going forward. With buildings representing around 40% of global greenhouse gas emissions and large-scale investment in decarbonization on the rise, growth opportunities in net-zero building requirements will be a major business driver for the firm.

Rising home automation & security demand also bodes well for Johnson Controls. Home automation and security witnessed a significant jump last year. Wellness, usability, entertainment and security 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 micro-climate at 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 offerings. Its collaboration with Microsoft to build a comprehensive digital twin platform that supports the entire ecosystem of a building also bodes well. The partnership with Pelion will enable Johnson Controls to bring connected intelligence to all of the operational technologies. Alliance with DigiCert to provide customers with the most advanced and trusted connectivity for smart building technology also augurs well.

The launch of OpenBlue, the company’s latest digital platform, is likely to boost the top line going forward. Digital integration of OpenBlue with Johnson Controls' core building systems will optimize the performance of the full HVAC system, making the 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 sustainability products tailored for various segments, offers ample growth visibility. Johnson Controls’ ambitious set of new ESG commitments — including its target of achieving net-zero carbon emissions before 2040 with new OpenBlue digital products and services — are truly commendable.

We like the firm’s strong balance sheet and investor-friendly moves. Its low leverage (of around 29%) provides it with increased financial flexibility. During the fiscal third quarter, the company completed its fiscal 2021 target of $1 billion share repurchase and expects to repurchase an incremental $250 million of shares in the fiscal fourth quarter. 

Encouragingly, Johnson Controls has planned 150 new product launches for fiscal 2021, which are expected to boost its revenue pipeline. It also reaffirmed its fiscal fourth quarter and 2021 guidance yesterday. The company anticipates fiscal 2021 adjusted EPS in the range of $2.64-$2.66, indicating 18-19% year-over-year growth. Organic revenues are expected to scale up in mid-single digits year over year in 2021.

Impressive Three-Year Targets

Its fiscal 2022-2024 targets are set to buoy confidence in the stock. Enhanced digitization and integrated solutions, rebound in non-residential markets, growth driven by ESG trends (including sustainability and higher efficiency, decarb and net zero), and technology developments (related to IoT, Cloud, and edge intelligence) will be major growth drivers.

Johnson Controls expects revenues to witness a CAGR of 6-7% over the said time frame amid secular trends, and accelerated service and products growth. Earnings are forecast to witness a CAGR of 18-21%, courtesy of rising revenues, margin expansion, and capital deployment. EBITDA margin expansion of 250-300 basis points is projected, thanks to aggressive productivity program and a solid focus on cost discipline, which would lead to a reduction of SG&A costs (savings of $200 million) and COGS (savings of $300 million). It plans to deploy $8 billion capital via attractive dividends, stock buybacks, mergers and acquisitions, and organic re-investment. On an encouraging note, this Zacks Rank #3 (Hold) firm — whose peers include Resideo Technologies REZI, Allegion PLC ALLE and Vivint Smart Home VVNT — expects free cash flow to be 100% of adjusted net income. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here

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