EUR 850.00 For Business Accounts Only

Morningstar | Johnson Controls' Fundamentals Continue to Improve; Large Share Repurchase Program Looming

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 business, with more exposure to higher-margin, recurring service revenue. Tyco's suite of security and fire-protection products and services complements Johnson Controls' legacy building efficiency business, and the combination has resulted in operating synergies and enhanced Johnson Controls' market penetration. As a result of the merger, Johnson Controls announced that it was targeting over $1 billion of cost and productivity synergies by 2020. Johnson Controls has already realized over $550 million of synergies through 2018, and the firm's expects to realize an incremental $200 million in 2019.On Nov. 13, Johnson Controls announced it had reached an agreement to sell its power solutions business to a consortium of investors for $13.2 billion ($11.4 billion net of taxes and fees). The sale is expected to close by the end of June. Management intends to use $3 to $3.5 billion of the sale proceeds to pay down debt and use the remaining balance to repurchase shares. We think Johnson Controls' prudent capital allocation strategy in tandem with a simplified business model that is clearly showing improving fundamentals will help Johnson Controls close the gap between its current stock price and our estimate of its intrinsic value.As a pure play building technologies and solutions business, Johnson Controls stands to benefit from secular trends in global urbanization and increased demand for energy-efficient and smart building products and solutions. We believe these secular tailwinds should allow Johnson Controls to grow faster than the economies its serves.