Rising Geopolitical Risks And Mature Markets Will Curtail Prospects

Key Takeaways

• Overreliance on mature markets and slow expansion into high-growth regions constrains top-line growth and threatens long-term market share.
  
• Competitive threats, rising costs, and shrinking demand for building solutions are set to erode margins and limit the effectiveness of their recurring revenue strategy.
  
• Sustained demand, operational improvements, and expansion into high-value services and technology-driven verticals position the company for durable growth and stable, margin-accretive recurring revenues.

Catalysts

Engages in engineering, manufacturing, commissioning, and retrofitting building products and systems in the United States, Europe, the Asia Pacific, and internationally.

• As companies increasingly embrace remote and hybrid work models, demand for commercial real estate and the need for building systems solutions provided by Johnson Controls International is likely to stagnate or shrink over the next decade, resulting in long-term revenue headwinds and diminishing the anticipated growth in their recurring business model.
  
• Fragmentation of global supply chains and rising geopolitical risks are set to drive procurement costs higher and introduce persistent risks of production delays, ultimately squeezing gross margins and increasing the likelihood of downward pressure on net earnings, especially as JCI struggles to fully pass these costs onto customers.
  
• The company's heavy reliance on mature North American and European markets fundamentally limits its long-term revenue growth potential, and lack of exposure to rapidly expanding markets places a structural cap on top-line growth and risks long-term market share erosion.
  
• The accelerating commoditization of building management and HVAC solutions, coupled with consolidation among global real estate owners, is expected to increase pricing pressure and further compress margins, putting at risk the positive trends in segment profitability recently reported by JCI.
  
• Rapid innovation by new, more agile technology entrants-particularly those integrating advanced IoT and AI-threatens to erode JCI's market leadership, potentially resulting in competitive displacement, underperformance of digital initiatives, and ultimately, a decline in both revenue growth rate and net margin expansion over the coming years.

Johnson Controls International Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Johnson Controls International compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Johnson Controls International's revenue will grow by 3.5% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 9.6% today to 12.8% in 3 years time.
• The bearish analysts expect earnings to reach $3.3 billion (and earnings per share of $5.19) by about July 2028, up from $2.2 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 20.4x on those 2028 earnings, down from 32.6x today. This future PE is lower than the current PE for the US Building industry at 21.1x.
• Analysts expect the number of shares outstanding to decline by 1.49% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.0%, as per the Simply Wall St company report.

Johnson Controls International Future Earnings Per Share Growth

Risks

• Johnson Controls has achieved record backlog growth of 12 percent to 14 billion dollars, with sustained customer demand for its differentiated solutions, which supports strong future revenue visibility and potential top-line growth.
  
• The company is seeing significant margin expansion driven by operational efficiencies, strategic organizational changes, and a pivot to high-value services, which bodes well for further improvement in net margins.
  
• Johnson Controls' successful expansion and investment in verticals like data centers, supported by its technological differentiation with the York Chiller platform, are fueling robust growth in high-demand sectors-positively impacting both revenue and earnings.
  
• Service attachment rates and recurring business are growing, capitalizing on JCI's enviable 40,000-strong field force and establishing a foundation for durable, margin-accretive recurring revenue streams that can stabilize and grow earnings.
  
• The new CEO's focus on implementing Lean methodologies and continuous portfolio optimization, combined with a disciplined approach to pricing, capital allocation, and supply chain resilience, positions the company for improved cost structure and sustained long-term earnings growth.

Valuation

• The assumed bearish price target for Johnson Controls International is $82.49, which represents two standard deviations below the consensus price target of $108.73. This valuation is based on what can be assumed as the expectations of Johnson Controls International's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $130.0, and the most bearish reporting a price target of just $79.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $25.8 billion, earnings will come to $3.3 billion, and it would be trading on a PE ratio of 20.4x, assuming you use a discount rate of 9.0%.
• Given the current share price of $110.13, the bearish analyst price target of $82.49 is 33.5% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.