Company Reports

Before 2016, the market had mostly viewed Johnson Controls as an automotive-parts company because about two thirds of its sales came from automakers. However, after merging with Tyco and spinning off its automotive seating business, now known as Adient, in late 2016, Johnson Controls has become a more profitable and less cyclical pure-play building technology firm that manufactures HVAC systems and controls, fire and security products, and building automation solutions.

According to a report from Bloomberg News, activist investor Elliott Investment Management has built an over $1 billion ownership stake in Johnson Controls. Based on Morningstar data, we estimate Elliott’s investment in Johnson Controls makes it a top 10 shareholder. Shares of the narrow-moat-rated manufacturer of heating, ventilation, air-conditioning, refrigeration, fire, and security products traded roughly 3% higher during intraday trading on May 20. We’re maintaining our $72 per share fair value estimate.

Shares of Johnson Controls traded 7% lower on May 1, following the firm’s fiscal second-quarter earnings release. While the narrow-moat-rated manufacturer of climate control and fire and security solutions reported solid margin expansion and accelerating order growth, we believe investors were skeptical that it can achieve its full-year guidance of mid-single-digit percentage organic growth. The company delivered just 1 percentage point of organic growth during its fiscal second quarter and forecast low-single-digit third-quarter organic growth. Furthermore, Johnson Controls reported a GAAP net loss due to a $750 million charge to settle PFAS contamination litigation, a $230 million goodwill impairment charge, and a $33 million charge to remediate a product quality issue. As discussed in our April 12 analyst note, the cash outflow tied to the PFAS settlement isn’t large enough to affect our fair value estimate, and we like that the firm has resolved a good portion of its potential liability. In our view, Johnson Controls remains a “show-me story” in terms of its ability to consistently deliver strong financial performance in line with high-quality peers, and we’d expect to see fewer nonrecurring charges, such as the impairment and product quality issues.

On April 12, narrow-moat-rated Johnson Controls announced it will pay $750 million to resolve PFAS-related litigation involving wholly owned subsidiary Tyco Fire Products’ aqueous film-forming foam product. Tyco previously announced it would discontinue the production and sale of this product and other fluorinated firefighting foams by June. Johnson Controls will record a $750 million charge on its fiscal second-quarter income statement. Management expects to pay $250 million in late May and $500 million six months after the court approves the settlement. The company has insurance policies that should allow it to recover a portion of the settlement, but management cautioned that the amount and timing of such recoveries are uncertain.

Before 2016, the market had mostly viewed Johnson Controls as an automotive-parts company because about two thirds of its sales came from automakers. However, after merging with Tyco and spinning off its automotive seating business, now known as Adient, in late 2016, Johnson Controls has become a more profitable and less cyclical pure-play building technology firm that manufactures HVAC systems and controls, fire and security products, and building automation solutions.

Narrow-moat-rated Johnson Controls’ shares traded lower on Jan. 30 after the firm released its fiscal first-quarter financial results and revised its 2024 outlook. Johnson Controls’ first-quarter revenue fell just shy of the FactSet consensus estimate, and management lowered its full-year midpoint adjusted EPS target by roughly 1.5%. Nevertheless, management still expects mid-single-digit percentage organic revenue growth in fiscal 2024 and now forecasts segment adjusted EBITA margin to expand 50-75 basis points (25 basis points previously).

Before 2016, the market had viewed Johnson Controls as an automotive-parts company because about two thirds of its sales came from automakers. However, after merging with Tyco and spinning off its automotive seating business, now known as Adient, in late 2016, Johnson Controls has become a more profitable and less cyclical pure-play building technology firm that manufactures HVAC systems, fire and security products, and building automation and control products.

Narrow-moat-rated Johnson Controls has transformed over the last decade, shedding its automotive exposure and expanding its commercial building products portfolio with the addition of Tyco’s fire and security businesses. Now, roughly 45% of revenue is tied to commercial heating, ventilation, and air conditioning and 40% is from fire and security. Residential HVAC, industrial refrigeration, and other solutions account for roughly 15% of revenue.

Before 2016, the market had viewed Johnson Controls as an automotive-parts company because about two thirds of its sales came from automakers. However, after merging with Tyco and spinning off its automotive seating business, now known as Adient, in late 2016, Johnson Controls has become a more profitable and less cyclical pure-play building technology firm that manufactures HVAC systems, fire and security products, and building automation and control products.

Johnson Controls’ release of its fiscal fourth-quarter and full-year 2023 results was delayed about a month due to a late September cyberattack that disrupted some of its internal information technology systems, including financial reporting systems. Management said the incident is now behind the firm, although it did result in $60 million of lost or deferred revenue during the fourth quarter and was about a 40-basis-point headwind to segment adjusted EBITA margin. Even so, fourth-quarter organic revenue still increased 2% year over year and adjusted EPS was 6% higher than the year-ago quarter. Nevertheless, fourth-quarter revenue of $6.9 billion and adjusted EPS of $1.05 missed FactSet consensus estimates by 3% and 4%, respectively, and Johnson Controls’ shares fell over 7% during Dec. 12 intraday trading.

After market close on Sept. 27, Johnson Controls issued a Form 8-K filing disclosing that a cybersecurity incident had disrupted the firm’s internal information technology systems. The stock price declined approximately 2.5% on Sept. 28 in reaction to the news. According to an article published by Bleeping Computer, a ransomware attack originating in Johnson Controls’ Asia offices spread to broader IT applications. However, Johnson Controls said that much of the firm's IT infrastructure is unaffected. That said, it seems to us that the company’s financial reporting systems could be affected because the filing warned that this incident could delay the release of its fiscal fourth-quarter financial results. We currently don’t believe this incident will materially affect Johnson Controls’ customers, but mitigating the issue will certainly be an added (and unanticipated) expense, although such costs may be covered by insurance policies. We will maintain our near-term financial projections until we learn more about any fallout from this incident, likely during the firm’s upcoming fiscal fourth-quarter earnings call. Furthermore, we’re also maintaining our narrow moat rating and $72 per share fair value estimate. This cybersecurity incident will certainly be a near-term headache for Johnson Controls, but we don’t think it will affect our long-term outlook.

Johnson Controls shares fell about 10% during Aug. 2 intraday trading after the narrow-moat-rated firm released fiscal third-quarter financial results and revised its fiscal 2023 outlook. We think the market focused on management’s downward revision to organic revenue growth and free cash flow conversion this year. Management now sees high-single-digit organic growth in fiscal 2023 (down from 10% previously) with a 70% free cash flow conversion rate (80%-90% previously).

Before 2016, the market had viewed Johnson Controls as an automotive-parts company because about two thirds of its sales came from automakers. However, after merging with Tyco and spinning off its automotive seating business, now known as Adient, in late 2016, Johnson Controls has become a more profitable and less cyclical pure-play building technology firm that manufactures HVAC systems, fire and security products, and building automation and control products.

Narrow-moat-rated Johnson Controls continues to execute well amid a backdrop of strong demand for its commercial heating, ventilation, and air-conditioning products and solutions. Our outlook for mid-single-digit organic revenue growth and 100-150 basis points of adjusted operating margin expansion (relative to 2023) over the next five years remains intact. However, we raised our fair value estimate roughly 3% to $72 per share due to the time value of money since our last update. The market reacted favorably to Johnson Controls’ above-FactSet-consensus fiscal second-quarter revenue and adjusted EPS and modest upward revision to its full-year 2023 financial targets. Still, the stock trades more than 10% below our new $72 fair value estimate.

Before 2016, the market had long viewed Johnson Controls as an automotive-parts company because about two thirds of its sales came from automakers. However, after merging with Tyco and spinning off its automotive seating business, now known as Adient, in late 2016, Johnson Controls is now a more profitable and less cyclical pure-play building technology firm that manufacturers heating, ventilation, and air-conditioning systems; fire and security products; and building automation and control products.

In our view, Johnson Controls reported solid fiscal first-quarter results that featured 9% organic top-line growth (due to price increases), 140 basis points of adjusted operating margin expansion (to 10.6%), and a 24% increase in adjusted EPS (to $0.67). Nevertheless, Johnson Controls’ stock sold off on Feb. 1, perhaps due to a combination of below-consensus revenue (sales missed FactSet consensus by 3%) and free cash flow burn compared with the prior-year quarter (that is, a $430 million outflow compared with a $257 million inflow last year). Based on questions on the earnings call, there may be some skepticism that unfavorable sales mix (which was a headwind for first-quarter profitability) will abate.

Before 2016, the market had long viewed Johnson Controls as an automotive-parts company because about two thirds of its sales came from automakers. However, after merging with Tyco and spinning off its automotive seating business, now known as Adient, in late 2016, Johnson Controls is now a more profitable and less cyclical pure-play building technology firm that manufacturers heating, ventilation, and air-conditioning systems; fire and security products; and building automation and control products.

Before 2016, the market had long viewed Johnson Controls as an automotive-parts company because about two thirds of its sales came from automakers. However, after merging with Tyco and spinning off its automotive seating business, now known as Adient, in late 2016, Johnson Controls is now a more profitable and less cyclical pure-play building technology firm that manufacturers heating, ventilation, and air-conditioning systems; fire and security products; and building automation and control products.

We’ve maintained our $67 per share fair value estimate for Johnson Controls following the firm’s fiscal fourth-quarter earnings release. It was a strong quarter for the narrow-moat-rated firm, which featured 10% year-over-year organic revenue growth (9% from price and 1% from volume), 70 basis points of adjusted operating margin expansion (to 13.6%), and a 13% increase in adjusted EPS (to $0.99).

Before 2016, the market had long viewed Johnson Controls as an automotive-parts company because about two thirds of its sales came from automakers. However, after merging with Tyco and spinning off its automotive seating business, now known as Adient, in late 2016, Johnson Controls is now a more profitable and less cyclical pure-play building technology firm that manufacturers heating, ventilation, and air-conditioning systems; fire and security products; and building automation and control products.