VALUATION HIGHLIGHTS

1. North America constitutes 38% of the Trefis price estimate for Johnson Controls's stock.
2. Asia Pacific constitutes 38% of the Trefis price estimate for Johnson Controls's stock.
3. Global Products constitute 13% of the Trefis price estimate for Johnson Controls's stock.

WHAT HAS CHANGED?

JCI Stock Performance

JCI stock has shown strong gains of 35% from levels of $45 in early January 2021 to around $60 now (early January 2024), vs. an increase of about 25% for the S&P 500 over this roughly 3-year period.

However, the increase in JCI stock has been far from consistent. Returns for the stock were 75% in 2021, -21% in 2022, -10% in 2023, and 0% in 2024 (YTD). In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, 24% in 2023, and 0% in 2024 (YTD) - indicating that JCI underperformed the S&P in 2022 and 2023.

Q4 Fiscal 2023 Results

Johnson Controls reported a 3% growth in revenues to $6.9 billion, with Asia Pacific sales rising 8% and Global Products up 2%. The company's adjusted earnings grew 6% to $1.05 per share, led by revenue growth, and about 10 bps improvement in adjusted EBIT margin, and a lower share count. The company expects its full-fiscal 2024 organic revenues to rise in mid-single-digits and its earnings to be between $3.65 and $3.80 on a per-share and adjusted basis.

Focus on China and other Developing Countries

Increasing urbanization in the developing world, at a rate of 100,000 people a day, will create major opportunities for the company. Furthermore, environmental regulations are driving a need for greater energy efficiency. For example, China aims to go "green" by reducing its emissions. The Internet of Things (IoT) will be the number one form of connectivity, and the growing demand for smart building applications will contribute to the market expansion. These trends will help Johnson Controls significantly boost its earnings, with multiple opportunities for strategic growth across the current platforms of the company.

Sale of its Power Solutions segment

In April 2019, Johnson Controls completed the sale of its Power Solutions business to Brookfield Business Partners L.P. in a cash transaction valued at $13.2 billion.

POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

Below are the key drivers of Johnson Controls' value that present opportunities for upside or downside:

Buildings Solutions Asia Pacific

• Johnson Controls EBITDA Margin: Johnson Controls EBITDA margin has increased from 8.1% in fiscal 2016 to 10.5% in fiscal 2023. Looking forward, we forecast the margins to improve to 19% by the end of our forecast period in fiscal 2030. However, if Johnson Controls ships higher volumes of equipment and control systems, and higher service volumes, along with better price realization, it may see its margin expand at a faster pace. If the Building Solutions EBITDA margins grow to north of 23% by the end of our review period, it will result in more than a 20% upside to our price estimate for JCI.

BUSINESS SUMMARY

Johnson Controls is a global multi-industry company that provides heating, ventilation, and air-conditioning (HVAC), and other mechanical systems for buildings. The company also provides technical services, energy management consulting, and operational support for the entire real estate portfolios in the non-residential buildings market. It also provides industrial refrigeration products.

The company's Buildings segment includes building efficiency, fire equipment, and security services division. Johnson Controls is a global leader in delivering integrated control systems, mechanical equipment, products, and services designed to improve the comfort, safety, and energy efficiency of non-residential buildings and residential properties with operations in 70 countries. Revenues come from technical services and the replacement and upgrade of HVAC controls and mechanical equipment in the existing buildings market, where the Company's large base of current customers leads to repeat business, as well as with installing controls and equipment during the construction of new buildings. Customer relationships often span the entire building lifecycle.

Johnson Controls is also a leading global provider of security products and services, fire detection and suppression products and services, and life safety products. The business offers a broad portfolio of products and services sold under well-known brands such as Tyco, SimplexGrinnell, Sensormatic, Wormald, Ansul, Simplex, Scott, and ADT (other than in the U.S., Canada, and Korea) and serves security, fire detection, and suppression and life safety needs across commercial, industrial, retail, small business, institutional and governmental markets, as well as non-U.S. residential markets.

KEY TRENDS

Impact of Covid-19 Pandemic

The global spread of coronavirus resulted in lockdowns in various cities across the globe, which affected industrial and economic activity in the first half of 2020. This led to a significant impact on the overall demand across the globe.

A company such as Johnson Controls, which primarily provides heating, ventilation, air-conditioning, and mechanical systems, among other products and solutions for buildings, has seen its sales decline. That said, the company saw a rebound in demand since fiscal 2021.

Existing partnerships and distribution channels in major emerging markets will help Johnson Controls exploit the HVAC market opportunities

Emerging markets like China are projected to contribute a major share of growth in the global HVAC market due to increasing income levels, continuing urbanization, and lower current penetration levels of HVAC equipment. China dominates the global HVAC market and accounts for the highest unit sales annually. Johnson Controls' strong presence in China and other major developing markets positions the company well to take advantage of these growth opportunities.

Growing residential as well as non-residential construction spending in developing countries

Residential as well as non-residential construction spending from developing countries is rising as a large number of people in these countries are moving from rural areas to cities. The growth potential is also huge as the percentage of the population living in cities in the less developed regions of the world (all of Africa, Asia excluding Japan, Latin America, and the Caribbean) is much below the percentage of the population living in cities in the developed regions of the world. Even countries such as China and India that have seen more than two decades of high growth have a significant proportion of their populations living in rural areas. China, for instance, still has around 45% of its population living in rural areas, while India has around 65% of its population living in rural areas. In comparison, developed countries such as the U.S., U.K., and Japan have over 80% of their populations living in cities. Thus, in the coming years, as people in these developing countries move from rural areas to cities, large investments in housing, commercial buildings, and other infrastructure will be made. This will provide a large growth opportunity for Johnson Controls' building market businesses.

Growing global trend of energy efficiency

The growing global trend of higher energy efficiency driven by rising energy prices and efforts to slash emissions will benefit Johnson Controls.

Environmental regulations are driving a need for energy efficiency, with 50% of new construction in China expected to be "green" over the next few years. Higher energy efficiency in buildings is a growing demand for the company's energy-related advisory services. In this space, Johnson Controls' growth is also helped by the fact that investments by customers in building energy efficiencies are recovered over time through lower operational costs.

Focus on air quality to help sales of HVAC

Homeowners are becoming increasingly aware of air quality issues. Allergies are the 6th biggest cause of chronic illness in the U.S. This awareness will help increase sales of ventilation equipment.