A Member of Pat McKeough’s Inner Circle recently asked for his advice on Johnson Controls International, a manufacturing company that creates, maintains and upgrades HVAC equipment and related systems and controls for its customers.
Pat likes the company’s increased focus on higher-margin businesses as it streamlines its operations to meet the rising demand for digitally-connected, energy-efficient HVAC systems. Moreover, the presence of an activist investor should spur its turnaround.
[ofie_ad]
JOHNSON CONTROLS INTERNATIONAL (Symbol JCI on New York) manufactures commercial and residential HVAC equipment, industrial refrigeration systems, controls, security systems, fire-detection systems and fire-suppression solutions.
The company also provides technical services, including maintenance, management, repair, retrofit and replacement of equipment in the HVAC, industrial refrigeration, security and fire-protection markets. In addition, Johnson Controls offers energy-management consulting.
Johnson Controls operates in four main segments: Building Solutions North America (38% of sales); Building Solutions Europe, Middle East, Africa, Latin America [EMEA/LA] (15%); Building Solutions Asia Pacific (10%); and Global Products (37%). Its brands include Trane HVAC and Tyco fire and security systems.
The company is multinational but based in Ireland for tax purposes. Its main office is in Wisconsin, where it was founded in 1885.
In early 2019, the company sold its Power Solutions business, which includes its automotive battery unit, to Brookfield Business Partners (symbol BBU.UN on Toronto) for $13.2 billion U.S. To finance the purchase, Brookfield was joined by a group of Canadian institutional investors, including pension fund Caisse de dépôt et placement du Québec.
The sale let Johnson Controls become a pure-play building technologies and solutions provider, including “delivering the (Internet) connected building of the future.”
Inner Circle: Improved focus inspires additional potential asset sales for Johnson Controls International
After the sale of its battery business, Johnson Controls was then focused on its heating, cooling, fire protection, and security products and services. Those businesses had higher profit margins and better prospects for growth than the automotive battery business.
On January 30, 2024, the company announced that it is exploring the sale of some of its HVAC (Heating, Ventilation, and Air Conditioning) businesses. These could include York International, which it acquired in 2005 for $2.4 billion; and the 60% stake in a joint venture it has had with Japan’s Hitachi since 2015 (Hitachi has a first right of refusal for that potential deal).
In June 2024, Johnson Controls agreed to sell most of Air Distribution Technologies business for an undisclosed amount; it paid $1.6 billion for that business in 2014.
Johnson is reportedly seeking up to $5 billion for all of those assets. The sales would represent less than one-quarter of its overall business. A deal could help the company focus more resources on its other business, including further development of its Open Blue software platform for operating smart buildings.
The commercial real estate sector is currently weak, but the move to upgrade existing HVAC with digitally connected, more efficient products is on the rise. That reflects commercial and residential concerns about increasingly expensive energy and electricity costs. It also bodes well for Johnson Controls’ IoT equipment sales to datacentres, government buildings, and industrial plants.
Activist investor Elliott Management, which has a long history of improving value at undervalued companies, now owns roughly $1 billion of Johnson’s shares. It has not yet made any demands but likely supports Johnson’s plan to sell some of its less-important businesses.
The stock now trades at 18.7 times the forecast 2024 earnings of $3.58 a share. The shares yield a solid 2.2%.
Recommendation in Pat’s Inner Circle: Johnson Controls International is a buy.
