Why Johnson Controls’ Stock Looks Fairly Priced

by Trefis Team
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Johnson Controls
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Johnson Controls (NYSE: JCI) closed its fiscal year 2019 (ended September 2019) on a mixed note, with the company beating consensus expectations for earnings but missing on revenues. Overall FY’19 was a decent year for Johnson Controls as the company’s revenue increased by 2.5% to nearly $24 billion while adjusted EPS grew by more than 50% to $1.96 driven by favorable volume leverage as well as cost synergies and productivity savings. Notably, the company’s sale of its Power Solutions division last November proved to be an important step towards becoming a pure-play building solutions company, and the company has been successful in achieving its financial targets for the year 2019. While the company provided upbeat guidance for FY’20, we believe that the market has already priced in all these factors in Johnson Controls’ valuation which looks appropriate at its current level of around $43 a share.

Below we provide a detailed explanation of the factors that could impact the company’s valuation and also look at the company’s major revenue sources :

A Quick Look At Johnson Controls’ Revenues

Johnson Controls reported $24 billion in Total Revenues in FY 2019, adjusting for the Power Solutions division which was sold off early in the year. This included 4 revenue streams:

  • Building Solutions North America: $9 billion in FY 2019 (38% of Total Revenues). This includes Building Solutions provided in the North America region.
  • Building Solutions EMEA/LA: $3.7 billion in FY 2019 (15% of Total Revenues). This includes Building Solutions provided in Europe, Middle East, Africa, and Latin America regions.
  • Building Solutions Asia Pacific: $2.7 billion in FY 2019 (11% of Total Revenues). This includes Building Solutions provided in the Asia Pacific region.
  • Global Products: $8.6 billion in FY 2019 (36% of Total Revenues). This includes the design and production of heating and air conditioning for residential and commercial applications across the globe.

 

Major Factors That Could Impact Johnson Controls’ Valuation:

#1 Building Solutions North America Continued Its Good Showing And Is Expected To Continue To Do So

  • North America is Johnson Controls’ largest segment accounting for roughly 37% of total revenues as of 2019. This segment reported a strong performance in FY’19 with sales increasing by 4% (y-o-y) to $9 billion, driven by continued strength in both install and service, led by strength in applied HVAC and Controls businesses, which increased in high single-digits range.
  • Moreover, the segment’s adjusted EBITDA margin expanded by 40 basis points to 14.9% led by favorable volume leverage as well as synergy and productivity saving.
  • The segment reported a backlog of $5.8 billion in 2019, up 8% organically. With ample order backlog and robust demand for its HVAC and Fire & Security equipment, this segment to poised to lead the company’s growth in FY’2020.

#2 Building Solutions Asia Pacific Will Continue To Grow Despite Weak Economic Environment

  • Asia Pacific has seen steady growth over the last few years. In 2019, sales grew 7% (y-o-y) organically to $2.66 billion, led by accelerating project installation activity, which grew over 9% in Q4.
  • Moreover, strong growth in HVAC and Business Management System (BMS) platforms particularly in China continued to drive the segment’s growth in 2019.
  • Adjusted EBITDA margins declined 1% to 14.2% though due to a higher installation mix as well as expected margin pressure.
  • Despite increasing competition and weakening economic conditions in Asia, we expect this segment to achieve positive sales growth in FY’2020 as the segment enjoys a backlog of more than $1.5 billion.

#3 Building Management System Will Likely Keep Demand For Global Product Segment Upbeat

Details about how Johnson Controls’ Global Product segment has grown over the years, and how it is expected to fare in FY’20 are available in our interactive dashboard.

Per Trefis estimates, JCI’s adjusted EPS for 2020 is likely to be $2.53. Taken together with a P/E multiple of 17x, this works to a fair value of $43 for Johnson Controls’ stock which is similar to the current market price.

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