5. Johnson Controls International plc (NYSE:JCI)
Short % of Shares Outstanding: 1.27%
Number of Hedge Fund Holders: 46
Forward Price to Earnings Ratio as of August 28: 19.44
Johnson Controls International plc (NYSE:JCI) provides technology solutions for buildings, energy products, integrated infrastructure, and next-generation transportation systems. Its portfolio of technology products includes fire, security, HVAC, power solutions, and energy storage that serves large-scale commercial and small-scale home setups.
It has operations in North America, Europe, and Asia, and is in contract to provide its technologies for various government and commercial facilities.
Johnson Controls International plc (NYSE:JCI) has been away from investor eyes due to its sluggish performance in the past. Over the past 5 years, the company grew its revenue by only 2.44% and dropped its bottom line by around 23%.
However, the stock has popped up again as a prominent activist Elliott Investment Management built a position worth more than $1 billion in the company. Since the start of 2024, the stock has gained more than 24% and investors are buying with expectations that Elliott has plans to boost the share price. Moreover, JCI is also popular among hedge funds and was held by 46 hedge funds, with total stakes worth $2.52 billion. Fisher Asset Management is the top share holder of the company with a position worth $982.8 million.
On July 31, Johnson Controls International plc (NYSE:JCI) announced its FQ3 2024 earnings results with margin expansion exceeding the company’s expectations. The company delivered organic sales growth of 3% in line with its guidance and delivered 150 base point expansion to its segment margins to 17.9%, exceeding expectations of 17%.
Management has indicated its strategic ambition of becoming a pure-play data center solutions company. It has been making significant investments to build technologies for data center solutions and has built a leading market position in North America. The company grew its order backlog by 10% during the quarter giving confidence to its investors for long-term growth.
Management faces some pressure from its ongoing business transformation concerning the divestitures of its Residential and Light Commercial HVAC business and Air Distribution Technologies business. However, regardless, the company generated over $500 million in free cash flow and also witnessed a 9% growth in its service revenue.
Moving ahead, management expects 7% sales growth in Q4, with improved EBITDA margins at 19% and diluted EPS of $1.23 to $1.26. JCI is undervalued at current levels, making it an attractive investment opportunity. It is trading at 19 times its forward earnings, while the broader market average sits at 24. Moreover, its earnings are also expected to grow by 5% during the year to reach $3.67.
Diamond Hill Capital Mid Cap Strategy stated the following regarding Johnson Controls International plc (NYSE:JCI) in its first quarter 2024 investor letter:
“Though valuations have increased, we continue identifying high-quality companies we believe the market is overlooking. We accordingly initiated four new positions in Q1: Generac Holdings, Diamondback Energy (FANG), Johnson Controls International plc (NYSE:JCI) and Humana. We initiated a position in Johnson Controls (JCI), a leading provider of HVAC, security and fire detection/suppression and building management systems as we believe the company is well-positioned to benefit from the secular trend toward smart buildings and a shift to high-margin services. While JCI has not executed particularly well recently, we believe the market has overreacted to these issues while also underappreciating the potential magnitude of the aforementioned secular tailwinds. We accordingly capitalized on the opportunity to establish a position at a steep discount to JCI’s HVAC peers and our estimate of intrinsic value.”
