Johnson Controls International plc

 

A few years ago, JCI merged with Tyco (and spun off Adient); the company employs over 130,000 people in 130 countries focusing on buildings solutions for energy efficiency and fire and security.  They completed the sale of their Power Solutions business on April 30, 2019 for net proceeds of ~$11.6bn.  Earnings are improving strongly due margin improvement coupled with debt repayment and share repurchases. I am looking at core EPS which factors in the debt repayment and share repurchases that have already been done. Guidance for FY20 factors benefits from continued margin improvement especially in the first half of FY20. While the valuation has normalized, continued organic growth and margin expansion could deliver continued EPS growth and could support higher prices for the stock. I like JCI but I do not expect it to deliver the most dynamic performance given the valuation normalization.

 

Ests:     4Q20   1Q21   FY20    FY21

Revs     5.7b     5.3       22b      22.7b   

EPS      .73       .39       2.21     2.45

 

P=43.94, Net Debt 5.87bn, D/C=25%, Div=1.04, yield=2.4%, TTM EPS 2.24, P/E 20X

 

4Q20   .76 vs .78 -3%, est .73 up from .65, FY20 EPS 2.24 vs 1.96 +14%

  • Nov 3, 2020, P=43.94, TTM EPS=2.24, P/E=20X

  • Revs -5.1% to 5.95bn, EBIT 12.9% vs 12.9%, EBIT -5.1%, orders -7%

  • adj FCF 1bn vs 1bn, FY adj FCF 1.9 vs 1.7 (115% of NI)

  • Buildings NA -6.6% to 2.2bn, EBITA -3.3%, EBITA 15.4% vs 14.9%, orders -9%, Backlog flat at 5.9bn

  • Buildings EMEA/LA -4.4% to 906, EBITA -7.7%, EBITA 11.4% vs 11.7%, orders -7%, Backlog +1% to 1.6bn

  • Buildings Asia Pac -9% to 661m, EBITA -5.8%, EBITA 14.7% vs 14.2%, orders +2% , Backlog +10% to 1.7bn, significant improvement in China 

  • Global Products -2.5% to 2.1bn, EBITA -9.1%, EBITA 17.8% vs 19.1%

  • Guidance: 1Q Revs -5 to -7%, EBIT margins +20-40bps, EPS .39-.41 vs .40, plan to buyback the remaining $1bn from Power Solutions sale through the year, mgmt. responded to a question that FY21 EPS 2.45-2.50 wouldn’t be unrealistic

  • Mgmt very optimistic about OpenBlue

3Q20   .67 vs .65 +3% est .48

  • Jul 31, 2020, P=37.24, TTM EPS 2.40, P/E=15X

  • Revs -17% to 5.3bn, adj EBIT margin 13.2% vs 12.5%, EBIT -13%

  • Buildings NA -13% to 2bn, EBITA 311m vs 310m, EBITA margin 15.4% vs 13.3%, orders -16%, Backlog +2% to 5.8bn

  • Global Products -21% to 1.98bn, EBITA -20% to 385m, EBITA margin 19.5% vs 19.2%

  • Buildings EMEA/LA -18% to 756m, EBITA -40% to 62m, EBITA margin 8.2% vs 11.2%, orders -20%, Backlog +2% to 1.7bn

  • Buildings Asia Pac -15% to 588m, EBITA -6% to 92m, EBITA margin 15.6% vs 14.2%, orders -10%, Backlog +4% to 1.6bn

  • CFO 833m vs 608m

  • Mgmt believes orders have bottomed in May

  • 4Q Guidance: Revs -9-11%, adj EPS .68-.72, (-13% to -8%, est .65)

  • Launched “Open Blue” product of years of work, digital platform for future of smart, connected and sustainable buildings, digital integration, includes cleaner air, touchless environments, contact tracing, improved security with thermal cameras

  • Cost reductions ahead of their expectations

2Q20   .42 vs .41 +2.4%, est .36 down from .47

  • May 1, 2020, P=29.11, TTM EPS 2.38, P/E=12X

  • Revs -6% to 5.4bn, adj EBIT margin 8.1% vs 8.1%, EBIT -6% to 440m

  • Buildings NA -1% to 2.18bn, EBITA margin 11.6% vs 11.8%, organic orders -7%, Backlog +4%

  • Global Products -9% to 1.89bn, EBITA mgn 11.4% vs 12.2%, 

  • Buildings EMEA/LA -3% to 850m, EBITDA margin 10% vs 9.2%, organic orders -4%, Backlog +6%

  • Buildings Asia Pac -16% to 525m, EBITA mgn 12.4% vs 12.1%, organic orders -11%, Backlog +3%

  • JCI teams have been helping with design and construction of temporary hospitals since early days of COVID19 in Wuhan

  • Reported EPS up on lower interest expense and better NC, this was the last quarter of interest expense leverage.

  • Withdrew FY20 guidance, thinking 2H revs -15-20% with most significant impact in coming quarter, cost cutting 400-450m (~80% temporary)

  • The new normal could present opportunities to provide safer building environments including screening, tracing, credential management, more sophisticated ventilation; touchless access, lighting and temperature controls; remote monitoring, in general more automation

  • In April raised additional 1.25bn in debt to provide additional cash buffer, 2 undrawn credit facilities which would provide additional 3bn of available credit.  

  • Committed to maintaining dividend given strong liquidity and solid balance sheet, further addressing permanent cost cuts, better productivity to have a better margin structure in FY21

1Q20   .40 vs .26 +54%, est .38

  • Jan 31, 2020, P=40.51, TTM core EPS=2.38, P/E=17X, FY20 P/E=16X

  • Revs +2% to 5.6bn, +3% organic, adj EBIT margin 8% vs 7.3%, EBIT +12% to 448m, Field orders flat organically vs strong comp last year, Backlog +6% organically

  • Buildings NA +2% to 2.2bn, +3% organic, EBITA margin 12% vs 12%, organic orders -1% vs strong comp, Backlog +7%

  • Buildings EMEALA +2% to 928m, +7% organic, EBITA margin 9.7% vs 8.5%, organic orders +4%, 

  • Buildings Asia Pac +3% to 629m, +3% organic, EBITA margin 11.4% vs 10.8%, orders +1% organic, Backlog +2%

  • Global Products +1% to 1.85bn, +2% organic, EBITA margin 11% vs 10.6%, Backlog +8%

  • Core EPS = TTM EBIT 2538 – (52*4) = EBT 2330 -13% tax and -185 NCI /774 diluted shares

  • FY20 Guidance reaffirmed EPS 2.50-2.60, low to mid-single digit order growth.

  • Mgmt sees robust order pipeline

4Q19   .78 vs .57 +37%, est .76, FY19 EPS +23% to 1.96

  • Nov 7, 2019, P=44.23, TTM EPS=1.96, P/E=23X, TTM core EPS 2.22, P/E=19X, FY20 P/E=17X

  • Revs +1% to 6.3bn, organic +3%, adj EBIT margin +80bps to 12.9%, adj EBIT +8.3% to 812m

  • Field orders +5% organically, Backlog +8% organic

  • Buildings NA +3% to 2.4bn, EBITA margin 14.9% vs 14.5%, organic orders +7%, Backlog +8%

  • Buildings Asia Pac +5% to 726m, +7% organic, EBITA margin 14.2% vs 15.2%, organic orders flat, Backlog +4%, margin impacted by mix 

  • Buildings ROW flat to 948m, +4% organic, EBITA margin 11.7% vs 10.9%, organic orders +3%, Backlog +10%

  • Global products -1% to 2.2bn, flat organic, EBITA margin 19.1% vs 17.8%, 

  • FY19 adj FCF 1.7bn ex 500m restructuring items.

  • FY20 Guidance: Organic growth low to mid-single digits, EBIT margin expansion 60-80bps, EPS +28-33% to 2.50-2.60, est 2.58

  • Continued decent results and execution, valuation has normalized but continued execution and growth could carry the stock higher.

  • Conference call comments to follow.

3Q19   .65 vs .54 cont. ops, +20%, est .63 up from .59

  • July 31, 2019, P=41.27, TTM core EPS 1.81, P/E=23X, FY20 P/E=16X

  • Revs +3% to 6.5bn, organic +6%, adj EBIT margin +50bps to 12.5%, adj EBIT +7% to 809m

  • Field orders +6% organically, Backlog +7% organic 

  • Buildings NA +4% to 2.3bn, +4% organic, EBITA margin 13.3% vs 14.2%, organic orders +6%, Backlog +6%, margin impacted by mix and salesforce additions

  • Buildings Asia Pac +1% to 691m, +6% organic, EBITA margin 14.2% vs 14.2%, organic orders +1%, backlog +7%

  • Buildings ROW slightly down to 922m, +6% organic, EBITA margin 11.2% vs 10.6%, organic orders +8%, backlog +11%

  • Global Products +3% to 2.5bn, +7% organic, EBITA margin 19.2% vs 18.2% 

  • YTD, ~14% of shares outstanding have been repurchased for $5.1bn, repaid 5.1bn debt

  • FY19 Guidance: EPS 1.93-1.95, +21-23% (raised bottom end), implies 4Q EPS .76-.78, est .75

  • Solid results as mgmt. continues to execute, stock looks reasonably priced on FY20 estimates.  

  • Mgmt indicated they are beow their target debt ratio (2-2.5X debt/EBITDA) and it will likely trend up towards target (more share repurchases?)

2Q19   .32 vs .26 +23%, est .30

  • May 1, 2019, P=37.50, TTM core EPS 1.70, P/E=20X, FY19 P/E=21X guidance midpoint

  • Revs +3% to 5.8bn, organic +6%, EBIT margin +60bps to 8.1%, EBIT +10% to 469m

  • Field orders +2% organically, Backlog +6% y/y organic ex fx, orders impacted by timing, pipeline remains robust, still tracking to mid to high-single digit growth for the year.  

  • Buildings NA +4% to 2.2bn, +5% organic, EBITA margin 11.8% vs 11.6%, organic orders +2%, Backlog +5% to 5.6bn

  • Buildings Asia Pac +7% to 628m, +12% organic, EBITA margin 12.1% vs 12.1%, organic orders +1%, Backlog +8% to 1.6bn

  • Buildings ROW -3% to 878m, +4% organic, EBITA margin 9.2% vs 8.6%, organic orders +3%, Backlog +9% to 1.7bn

  • Global Products +2% to 2.1bn, +7% organic, EBITA margin 12.2% vs 11.6%, 

  • Closed sale of Power Solutions for $11.6bn, will repay 3.4bn in debt and expected to repurchase $8.2bn in shares, will conduct a modified dutch auction for $4n between $36-$40

  • FY Guidance: Raised EPS to 1.85-1.95 (+16-23%, est 1.81) from 1.75-1.85 due to additional .10 benefit from sale of Power Solutions

  • Decent results, valuation continues to be attractive given the level of improvement we’re seeing, mgmt. confident operating leverage will be more evident as pricing actions over the past 12 months work from backlog into revenues plus debt reduction and share repurchases.

1Q19   .26 vs .21 from cont ops, +24%, est .24

  • Feb 1, 2019, P=33.77, TTM cont ops 1.64, P/E=21X, TTM EPS incl Power 2.94, effecting for 

  • Revs +3% to 5.5bn, organic +6%, EBIT margin +50 bps to 7.3%, core EBIT +60bps (ex M&A and fx), EBIT +10%, Corp Exp -11%

  • Buildings NA +5% to 2.1bn, EBITDA +30bps to 12%, EBITDA +7%, organic orders +5%, Backlog +4% organic to 5.4bn

  • Buildings Asia +3% to 614m, +6% organic, EBITA margin -160bps to 10.8%, EBITA -11%, organic orders +9%, organic Backlog +12% to 1.5bn

  • Buildings ROW -1% to 907m, +4% organic, EBITA margin +70bps to 8.5%, EBITA +8%, organic orders +9%, organic Backlog +15% to 1.6bn (margins hit by mix, salesforce additions, and margin pressure)

  • Global Products +3% to 1.8bn, +7% organic, EBITA margin +60bps to 10.6%, EBITA +9%

  • Field orders +7%, Backlog +7% organically

  • FY19 Guidance: Organic Revs up mid-single digits, incremental cost savings $200m, EPS 1.75-1.85, +10-16% which is slightly above the $1.65-1.75 given when sale of Power was announced, Current stock price is 20X the midpoint but does not account for dividend or share repurchase.  Expect Power to close no later than June 30th.

  • Solid results, decent guidance.  Valuation is a tricky exercise right now because of uncertainty of timing and price of share repurchases).  On Cont ops, it’s 20X trailing however that ignores the value from Power.  On a TTM basis including Power, it’s 11X however that ignores some of the debt repayment.  If walking through lower interest expense and a share repurchase effected at prices 10% above current levels, core TTM earnings power could be $2.29 per share putting at P/E at 15X and 15% growth would put FY19 at 2.63 and FY19 P/E=13X, FY20 estimates look low on that basis.  Mgmt stated incremental benefits from share repurchases and lower corp costs (from their guidance) would put FY20 EPS at 2.25-2.45 not factoring in operational growth or capital deployment (with another .10-.20 benefit in FY21 from share repurchases).  That’s largely consistent with my walkthrough to get the earnings power for FY19 if it was all completed for the whole year.  

  • I think the stock is fundamentally attractively priced however it will take time for that to become apparent as share repurchases will be done in FY19 and FY20 with full benefit not hitting until FY21, investors will need to be patient. 

Mid Quarter Update

  • Nov 13, 2018, Announced sale of Power business for $13.2bn, expect to net $11.4bn

  • Expect to repay 3-3.5bn in debt, remainder likely to go shareholders (buyback?).

  • Financials ex Power: FY18 Revs +2.6% to 23.4bn, EBITA margin 13.2% vs 13.2%, EPS +13.6% to 1.59 w/12.5% TR (puts power at 44% of FY18 EPS, a littler higher than the 32% of EBITA), Quarterly EPS: 1Q18 .21, 2Q18 .26, 3Q18 .54, 4Q18 .57

  • FY19 Guidance of $2.90 to $3.05 includes $1.28 from power so pro forma continuing ops $1.65-1.75 ex power (+~7%) then add $0.75 from $3-3.5bn debt repayment, $7.9-8.4bn share repurchase, and lower corporate costs would put FY19 pro forma EPS ~$2.40-2.50 once the share repurchase is effected (at what price?).  At $33.40, puts the stock at 20X the $1.70 FY19 pro forma EPS guidance before the debt repayment, share repurchase, and lower corp. costs but at 14X after the transactions are done, roughly in line with my analysis.

4Q18   .93 vs .87, +7%, est .93.  FY18 2.83 vs 2.60, +9%

  • Nov 8, 2018, P=33.40, TTM EPS=2.83, P/E 13X, FY19 P/E=12X

  • Revs +3% to 8.4%, +6% organic, EBIT 14% vs 13.9%

  • Buildings NA +7% to 2.3bn, +8% organic, EBITA 14.5% vs 14.5%, organic orders +9%

  • Buildings Asia Pac +2% to 689m, +4% organic, EBITA 15.2% vs 16.1% organic orders +8%

  • Buildings ROW +3% to 948m, +6% organic, EBITA 10.9% vs 10.3%, organic orders +10%

  • Global Products -1% to 2.2bn, +9% organic, EBITA 17.8% vs 17.2%

  • Power +3% to 2.2bn, +2% organic, EBITA 19.4% vs 20.2%

  • FCF 1.3bn, FY18 FCF 2.3bn, Backlog +8% to 8.4bn

  • While Power review is not concluded, they have made significant progress.  

  • Guidance: FY19 Organic revs up mid-single digits, EPS 2.90-3.06 reflecting EBIT growth 8-12%, partly offset by .20 headwind from tax and fx

  • Decent results and guidance, valuation continues to be very attractive following market selloff. 

  • Power was 32% of FY18 EBITA, it’s not clear what that would be for EBIT but if I assume the same ratio, and sale of power eliminates interest expense, EBT would be 20% lower and would put the FY18 P/E at 16X, still attractive especially considering the acceleration of growth in the rest of the business.

  • Added $1bn to share repurchase, now $1.9bn

3Q18 .81 vs .71, +14%, est=.79

  • July 31, 2018 P=36.46, TTM EPS=2.74, P/E=13X, FY19 P/E=12X

  • Revs +6% to 8.1bn, +6% organic, EBIT 13.1% vs 13.0%

  • Buildings Solutions NA +5% to 2.2bn, EBITA 14.2% vs 13.5%, EBITA +10%, organic orders +8%

  • Building Solutions Asia Pac +8% to 681m, EBITA 14.2% vs 13.3%, orders -1%

  • Building Solutions ROW +4% to 926m, EBITA 10.6% vs 10%, orders +13%

  • Global Products +1% to 2.4bn, +7% organic, EBITA 18.2% vs 18.5%, +60bps ex divestiture

  • Power +14% to 1.8bn, +10% organic, EBITA 16.9% vs 18.9%, EBITA +2%

  • Added 375 salespeople, 775 YTD and expect ~900 by year end.

  • Continue to see margins on new orders expanding

  • FY Guidance: Tightened EPS to 2.80-2.82 from 2.75-2.85

  • CEO is please with progress of strategic review for Power Solutions, expect to conclude by release of 4Q results.

  • Encouraging results, valuation looks very attractive given solid organic growth execution and improving margins.

2Q18   .53 vs .50, est .52, ex .06 items

  • Revs +3% to 7.5bn, +1% organic, EBIT 9.9% vs 9.8%

  • Building Solutions NA +1% to 2.1bn, EBITA 11.6% vs 11%, EBITA +7%, organic orders +4%, Backlog +5% to 5.3bn

  • Building Solutions Asia Pac +4% to 586m, -2% organic, EBITA 12.1% vs 11.9%, EBITA +6%, orders +10%, Backlog +15% to 1.5bn

  • Building Solutions ROW +2% to 907m, -3% organic, EBITA 8.6% vs 8.9%, EBITA -1%, orders +10%, Backlog modestly higher at 1.7bn

  • Global Products +1% to 2bn, +6% organic, EBITA 11.6% vs 12.6%, EBITA -6% due to divestiture

  • Power Solutions +9% to 1.8bn, -2% organic, EBITA 17% vs 17.9%, EBITA +4%, start-stop batter shipments +14%, outperforming Chinese market, making good progress on strategic review.

  • Added 400 new sales people and will continue to add in select regions and businesses, seeing better than expected productivity from new sales people, new bookings in NA have margins ~100bps higher y/y,

  • Guidance: Reaffirmed EPS 2.75-2.85, decent results, momentum continues to build.

1Q18   0.54 vs .53, est .53 down from .59, ex 0.25 items

  • Revs +5% to 7.4bn, +3% organic, organic field orders +5%, EBIT 10.1% vs 10.7%, EBIT -1%

  • Seeing traction in increasing sales capacity, margins on orders are improving

  • Building Solutions +4% to 2.0bn, EBITA 11.7% vs 12.2%, EBITA flat

  • Global Products -1% to 1.78bn (organic +6%), EBITA 10% vs 11.4%, EBITA -13% due to divestiture

  • Power Solutions +12% to 2.1bn (+1% organic), EBITA 18% vs 20.5%, EBITA -2%, start/stop battery shipments +20%

  • Guidance: Reaffirmed EPS 2.75-2.85 , headwinds continue in 2Q but start to abate q/q as the year progresses.

4Q17   .87 .79, vs est .87, FY17 EPS +13% to 2.60

  • Revs +4% to 8.1bn (+2% organic), EBIT 13.9% vs 13.1%

  • Building Technologies -1% to 6.0bn, (+1% organic) EBITDA 15.1% vs 14.3%, Backlog +4% to 8.5b

  • Power Solutions +18% to 2.1bn (organic +9%), EBITDA 20.2% vs 22.8%, EBITDA +4%, OEM shipments -5% in line with new vehicle prodn, aftermarket +8% with growth across all regions, start-stop shipments +30% led by growth in China and Americas. EBITDA margins pressured by lead prices and f/x.

  • Making good progress on streamlining initiatives, post Q repaid 1.9bn in debt after divestitures closed.

  • Plan on adding 400 salespeople in Buildings in FY18 to accelerate profitable organic growth, will put some pressure on 1H18 results, see some GM pressure in backlog, tightening approval process to incentivize GM and sales growth

  • Guidance: FY18 Organic rev growth +low single digits, EPS +6-10% to 2.75-2.85, expect 250m in cost savings in FY18

3Q 17.71 vs .61, est .71

  • Revs +1% to 7.7bn

  • Guidance: 4Q EPS .86-.88 (+13-16%), est .89, FY17 2.60-2.62, +13%, est 2.63

  • Stock reacting -8% to slightly lowered guidance, mgmt. called out a few execution issues but think they should be improving in FY18.

2Q 17.50 vs .43, est .49

  • Revs +3% to 7.2bn, +2% organic, Backlog +6% to 8.3bn

  • Guidance: 3Q EPS .70-.73 (+15-20%), est .72, FY17 2.60-2.68, +13-16%, previously 2.60-2.75, est 2.64, FY16 was 2.31

  • In March announced divesting Scott Safety business to 3M, expects net proceeds 1.8-1.9bn to repay debt (currently 13.4bn), looking across their portfolio for other non-core divestitures.

  • Stock reacted -2% in response to slightly lowered guidance, EPS growth opportunity still looks solid