On Friday, Morgan Stanley initiated coverage on shares of Johnson Controls (NYSE:JCI) International plc (NYSE:JCI), a company specializing in commercial building solutions, with an Overweight rating and a price target of $85.00. The firm identified the company's transformation into a pure-play provider of commercial building solutions—including HVAC, controls, fire, and safety—as a factor that could lead to a more durable business and offer a re-rating opportunity.
The analyst noted that Johnson Controls' service mix, which is approximately 30% pro-forma, combined with its increased exposure to industrial mega-trends such as data centers and U.S. reshoring, positions the company favorably within a more premium comparison group. Despite projections that put pro-forma F'26 EPS at a low- to mid-single-digit percentage below the company's existing operations, the analyst believes this can be balanced out by relatively minor cost reductions, equating to about 4% of divested sales. The result is an essentially unchanged EPS for a high-quality business, while Johnson Controls' stock continues to trade at a 2-3 turn discount compared to its peers.
Morgan Stanley expressed a bullish stance on the applied commercial HVAC upcycle, citing record backlogs and secular tailwinds that support continued order growth and an improved customer value proposition. The firm views HVAC services as a leading revenue stream within U.S. Industrials, where Johnson Controls is a market leader with approximately $6 billion in sales and around a 30% pro-forma mix.
The analyst also highlighted Johnson Controls' competitive edge in the HVAC services market, underscoring that the ability to invest in digitized service offerings has expanded the company's advantage over regional service providers who have historically dominated the market. This investment in technology is seen as a key driver for sustained high-single-digit service organic growth.
In other recent news, Johnson Controls International reported a robust financial performance for the third quarter of 2024, with a 3% organic sales growth and a segment margin of 17.9%. The company also announced a 10% increase in its backlog, reaching $12.9 billion. As part of a strategic shift, Johnson Controls is focusing on becoming a pure-play provider for commercial building solutions, particularly data centers, and has announced the divestiture of its Residential and Light Commercial HVAC and Air Distribution Technologies businesses.
In the midst of these financial developments, the company is undergoing significant changes, including the retirement of CEO George Oliver and the appointment of Patrick Decker, former CEO of Xylem (NYSE:XYL), to its Board of Directors. RBC Capital and Oppenheimer have adjusted their price targets for Johnson Controls, with RBC upgrading it to a Sector Perform rating and increasing the price target to $69.
Oppenheimer maintained an Outperform rating and increased the price target to $79, highlighting the company's successful transition into a technology-led solutions and services platform. These recent developments underscore Johnson Controls' ongoing transformation, with the company focusing on growth in the service and digital offerings, expecting mid- to high-single-digit growth in service business and mid-single-digit growth in systems business.
InvestingPro Insights
In light of Morgan Stanley's optimistic coverage on Johnson Controls International plc (NYSE:JCI), InvestingPro data and insights provide additional context for investors considering the stock. With a market capitalization of $46.35 billion and a P/E ratio that has adjusted to a more attractive 20.17 over the last twelve months as of Q3 2024, Johnson Controls appears to be priced favorably relative to its earnings. The company's commitment to shareholder returns is reflected in its consistent dividend payments over 54 years, alongside a recent trend of increasing dividends for the last three years. This demonstrates a balance between rewarding shareholders and maintaining financial flexibility, supported by a moderate level of debt as highlighted by one of the InvestingPro Tips.
Another InvestingPro Tip emphasizes Johnson Controls as a prominent player in the Building Products industry, which aligns with Morgan Stanley's view of the company's transformation into a pure-play provider of commercial building solutions. This positioning, along with a solid gross profit margin of 32.93%, suggests that Johnson Controls is leveraging its industry standing to maintain profitability, as also projected by analysts for the current year.
For investors seeking more in-depth analysis, there are additional InvestingPro Tips available that delve further into the company's financial health and market potential. With a fair value estimate from analysts at $78.5, and the InvestingPro Fair Value slightly lower at $73.44, the stock's recent price of $69.38 suggests there may be room for growth. These insights, coupled with the company's strategic focus and Morgan Stanley's bullish outlook, offer a comprehensive view for those considering an investment in Johnson Controls.
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