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Johnson Controls Stock Boasts Strong Prospects Despite Headwinds
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Johnson Controls International plc (JCI - Free Report) has been experiencing strong momentum in the Building Solutions North America and Building Solutions Europe, Middle East, Africa/Latin America (EMEA/LA) segments. Solid demand for heating, ventilation and air conditioning (HVAC) platforms in data centers and strength in controls businesses are driving the Building Solutions North America segment.
An increase in demand for HVAC platforms across Latin America and Middle East regions and strength in systems and service businesses are supporting the Building Solutions EMEA/LA segment. Recovery in the Global Products segment is an added positive for the company.
Investments in digital solutions, such as the OpenBlue platform, are expected to enhance growth by addressing customer needs. Johnson Controls has expanded its digital services to include connected chillers, industrial refrigeration and advanced building automation systems. Integrating OpenBlue with the company's core HVAC systems will optimize overall performance. The Net Zero Buildings as a Service offering within the OpenBlue platform features a comprehensive range of sustainability products tailored for different sectors, thus strengthening long-term prospects. Additionally, the company’s ambitious ESG commitments, including a target for net-zero carbon emissions by 2040 through its new OpenBlue digital products and services, are commendable.
Johnson Controls has been strengthening its business through acquisitions. The acquisition of digital workplace management and Internet of Things solutions provider, FM:Systems, in July 2023 expanded OpenBlue’s digital buildings offerings, adding cloud-based software as a service digital workplace management capabilities. Johnson Controls is simultaneously divesting non-profitable/non-core assets or businesses to focus on its core areas of growth.
In June 2024, the company entered into an agreement with Truelink Capital for the divestment of its Air Distribution Technologies business. Also, in July 2024, it inked a deal with Bosch Group for the divestment of its Residential and Light Commercial HVAC business. Both the divestitures will enable Johnson Controls to focus more on its core business and rebalance its portfolio toward commercial building solutions. The transactions are anticipated to be completed in the second half of 2024.
The company’s measures to reward its shareholders are encouraging. In the first nine months of fiscal 2024 (ended June 2024), Johnson Controls paid a dividend worth $753 million (up 3.3% year over year) to its shareholders. It also repurchased shares worth $876 million (up 42.9%) in the same period. The company had announced two dividend hikes in fiscal 2023. In June 2023, it hiked its dividend by 2.8% to 37 cents per share (annually: $1.48). In March 2023, the company raised its dividend by 2.9% to 36 cents per share.
In the past year, this Zacks Rank #3 (Hold) company’s shares have gained 45.1% compared with the industry’s 42.7% growth.
Image Source: Zacks Investment Research
However, the company is facing challenges in its Building Solutions Asia Pacific segment. In the fiscal third quarter, this segment saw a continued decline in system sales in China, leading to a 22% drop in sales for that period. Johnson Controls anticipates that economic conditions in China will remain weak throughout the rest of fiscal 2024, which could further affect the segment's performance in the short term.
Demand for the company’s products and solutions is largely driven by construction, facility expansion, retrofitting and maintenance projects across commercial, institutional, governmental and residential sectors. These construction projects are heavily influenced by general economic conditions and real estate demand. Any downturn in construction, industrial facility expansion, retrofitting, maintenance or other capital investments in buildings—due to a broader economic slowdown or supply-chain challenges—is likely to negatively impact the company's performance.
The escalating cost of sales poses a threat to Johnson Controls’ bottom line. Increased material cost inflation is pushing up its cost of sales. During the first nine months of fiscal 2024, the company witnessed a 1.8% year-over-year increase in the cost of sales to $13.4 billion. The impact of these expenditures is evident in the rise of the cost of sales as a percentage of total revenues, which climbed 70 basis points to reach 66.7%. It has been incurring higher corporate costs related to additional IT investments and cybersecurity enhancement costs. High costs and expenses will negatively impact its short-term profitability.
BRC delivered a trailing four-quarter average earnings surprise of 4.6%. In the past 60 days, the Zacks Consensus Estimate for Brady’s fiscal 2025 earnings has increased 4.6%.
Allegion plc (ALLE - Free Report) presently carries a Zacks Rank #2 (Buy). The company delivered a trailing four-quarter average earnings surprise of 10.3%.
In the past 60 days, the Zacks Consensus Estimate for ALLE’s 2024 earnings has increased 1.4%.
Parker-Hannifin Corporation (PH - Free Report) currently carries a Zacks Rank of 2. PH delivered a trailing four-quarter average earnings surprise of 2.6%.
In the past 60 days, the consensus estimate for Parker-Hannifin’s fiscal 2025 earnings has increased 1.4%.
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Johnson Controls Stock Boasts Strong Prospects Despite Headwinds
Johnson Controls International plc (JCI - Free Report) has been experiencing strong momentum in the Building Solutions North America and Building Solutions Europe, Middle East, Africa/Latin America (EMEA/LA) segments. Solid demand for heating, ventilation and air conditioning (HVAC) platforms in data centers and strength in controls businesses are driving the Building Solutions North America segment.
An increase in demand for HVAC platforms across Latin America and Middle East regions and strength in systems and service businesses are supporting the Building Solutions EMEA/LA segment. Recovery in the Global Products segment is an added positive for the company.
Investments in digital solutions, such as the OpenBlue platform, are expected to enhance growth by addressing customer needs. Johnson Controls has expanded its digital services to include connected chillers, industrial refrigeration and advanced building automation systems. Integrating OpenBlue with the company's core HVAC systems will optimize overall performance. The Net Zero Buildings as a Service offering within the OpenBlue platform features a comprehensive range of sustainability products tailored for different sectors, thus strengthening long-term prospects. Additionally, the company’s ambitious ESG commitments, including a target for net-zero carbon emissions by 2040 through its new OpenBlue digital products and services, are commendable.
Johnson Controls has been strengthening its business through acquisitions. The acquisition of digital workplace management and Internet of Things solutions provider, FM:Systems, in July 2023 expanded OpenBlue’s digital buildings offerings, adding cloud-based software as a service digital workplace management capabilities. Johnson Controls is simultaneously divesting non-profitable/non-core assets or businesses to focus on its core areas of growth.
In June 2024, the company entered into an agreement with Truelink Capital for the divestment of its Air Distribution Technologies business. Also, in July 2024, it inked a deal with Bosch Group for the divestment of its Residential and Light Commercial HVAC business. Both the divestitures will enable Johnson Controls to focus more on its core business and rebalance its portfolio toward commercial building solutions. The transactions are anticipated to be completed in the second half of 2024.
The company’s measures to reward its shareholders are encouraging. In the first nine months of fiscal 2024 (ended June 2024), Johnson Controls paid a dividend worth $753 million (up 3.3% year over year) to its shareholders. It also repurchased shares worth $876 million (up 42.9%) in the same period. The company had announced two dividend hikes in fiscal 2023. In June 2023, it hiked its dividend by 2.8% to 37 cents per share (annually: $1.48). In March 2023, the company raised its dividend by 2.9% to 36 cents per share.
In the past year, this Zacks Rank #3 (Hold) company’s shares have gained 45.1% compared with the industry’s 42.7% growth.
Image Source: Zacks Investment Research
However, the company is facing challenges in its Building Solutions Asia Pacific segment. In the fiscal third quarter, this segment saw a continued decline in system sales in China, leading to a 22% drop in sales for that period. Johnson Controls anticipates that economic conditions in China will remain weak throughout the rest of fiscal 2024, which could further affect the segment's performance in the short term.
Demand for the company’s products and solutions is largely driven by construction, facility expansion, retrofitting and maintenance projects across commercial, institutional, governmental and residential sectors. These construction projects are heavily influenced by general economic conditions and real estate demand. Any downturn in construction, industrial facility expansion, retrofitting, maintenance or other capital investments in buildings—due to a broader economic slowdown or supply-chain challenges—is likely to negatively impact the company's performance.
The escalating cost of sales poses a threat to Johnson Controls’ bottom line. Increased material cost inflation is pushing up its cost of sales. During the first nine months of fiscal 2024, the company witnessed a 1.8% year-over-year increase in the cost of sales to $13.4 billion. The impact of these expenditures is evident in the rise of the cost of sales as a percentage of total revenues, which climbed 70 basis points to reach 66.7%. It has been incurring higher corporate costs related to additional IT investments and cybersecurity enhancement costs. High costs and expenses will negatively impact its short-term profitability.
Stocks to Consider
Some better-ranked companies are discussed below.
Brady Corporation (BRC - Free Report) currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
BRC delivered a trailing four-quarter average earnings surprise of 4.6%. In the past 60 days, the Zacks Consensus Estimate for Brady’s fiscal 2025 earnings has increased 4.6%.
Allegion plc (ALLE - Free Report) presently carries a Zacks Rank #2 (Buy). The company delivered a trailing four-quarter average earnings surprise of 10.3%.
In the past 60 days, the Zacks Consensus Estimate for ALLE’s 2024 earnings has increased 1.4%.
Parker-Hannifin Corporation (PH - Free Report) currently carries a Zacks Rank of 2. PH delivered a trailing four-quarter average earnings surprise of 2.6%.
In the past 60 days, the consensus estimate for Parker-Hannifin’s fiscal 2025 earnings has increased 1.4%.