Milwaukee, Wisconsin – Johnson Controls has recently announced a strategic shift in its business focus by selling its residential Heating Ventilation & Air Conditioning (HVAC) business to Bosch in an $8.1 billion deal. This move is part of the company’s plan to redefine itself as a “Comprehensive Solutions Provider for Commercial Buildings,” emphasizing HVAC, fire safety, controls, security, and related services. Despite the pending transactions, approximately 10% of the business will remain non-core, hinting at possible future divestitures.
Johnson Controls has been consistent in its strategic direction, as evidenced by its adherence to the path laid out in previous years. The company aims to move beyond merely selling services to customers and instead focus on offering comprehensive solutions, including its OpenBlue Platform. Launched in 2020, OpenBlue is a software platform that provides data-driven “smart building” services, aligning with the projected growth of the Smart Building market by about 11% annually.
One distinctive aspect of Johnson Controls’ approach is its emphasis on outcome-based solutions across the lifecycle of a building, such as energy efficiency, which can result in cost savings for building operators. Additionally, the company has established 8 OpenBlue Innovation Centers to educate customers and business channel partners on the benefits of connected solutions. This unique strategy positions Johnson Controls ahead of competitors who primarily sell individual equipment or digital capabilities, not comprehensive suites of solutions.
During the most recent earnings call, outgoing CEO George Oliver highlighted the company’s progress in leveraging connectivity, data, and additional services to enhance its value proposition. Johnson Controls’ strategic transformation is a gradual process that involves technological developments, service enhancements, and reeducation efforts aimed at customers and the corporate ecosystem. The company’s divestitures, coupled with improved margins and profitability, indicate a potential upswing in sales momentum and profitability.
In terms of valuation and growth prospects, Johnson Controls is trading at around 20 times FY 2024 free cash flow with expectations of increased cash flow in FY 2025 due to the HVAC divestment. Analysts predict significant earnings growth potential, with a possibility of the stock price doubling in the next five years. Despite the company’s optimistic outlook, concerns linger regarding a cybersecurity breach in 2023, prompting the need for enhanced cybersecurity capabilities to safeguard its operations and data solutions push.
Looking ahead, Johnson Controls aims to strengthen its strategic position and cybersecurity measures while continuing its trajectory towards becoming a leading provider of comprehensive building solutions. With a target price of $90 within the next 12 to 18 months, representing a 25% upside potential, the company remains focused on driving long-term growth and value for stakeholders.
