Lean Practices And York HVAC Systems Will Drive Future Success

Key Takeaways

• The new organizational model and Lean practices are expected to drive revenue growth and enhance net margins significantly.
  
• Strong demand in key platforms and expanded service capabilities will contribute to more predictable revenue and higher margins.
  
• Operational complexity and restructuring may hinder revenue and margin improvements, while market pressures and execution risks threaten growth potential.

Catalysts

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

• Johnson Controls is expected to benefit from its new organizational model that aims to improve customer focus and operational execution, which should enhance revenue growth and net margin expansion.
  
• The company has significant opportunities for cost reductions and process improvements through the implementation of Lean practices, likely positively impacting net margins and overall earnings.
  
• Johnson Controls’ strong record backlog and sustained demand in key areas, such as its York HVAC and Metasys building automation platforms, provide a solid foundation for future revenue growth.
  
• The focus on expanding service capabilities and improving service attachment rates is likely to drive higher recurring revenue, thereby contributing to more predictable revenue streams and potentially higher margins.
  
• Strategic pricing actions and improvements in supply chain inefficiencies are anticipated to mitigate tariff impacts and drive margin improvement, supporting overall earnings growth.

Johnson Controls International Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Johnson Controls International's revenue will grow by 4.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.2% today to 11.8% in 3 years time.
• Analysts expect earnings to reach $3.1 billion (and earnings per share of $5.06) by about May 2028, up from $1.4 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $2.8 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 23.4x on those 2028 earnings, down from 41.0x today. This future PE is greater than the current PE for the US Building industry at 19.9x.
• Analysts expect the number of shares outstanding to decline by 1.94% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.99%, as per the Simply Wall St company report.

Johnson Controls International Future Earnings Per Share Growth

Risks

• The company's operational and innovation execution is hindered by complexities in current product offerings, SKU numbers, and operating methods, which could slow improvements in revenue and net margins.
  
• The recent restructuring into three geographical customer-oriented reporting segments could initially create disruptions and transitional challenges, affecting short-term earnings.
  
• The reliance on capturing pricing adjustments and executing Lean principles to offset tariff impacts and boost margins has significant execution risks, which could lead to disappointing margin improvements if not well executed.
  
• While there is potential in the data center market, the introduction of new competitors and changes in technology can add pressure on market share and revenue from this sector.
  
• Integration and successful expansion of service attachment rates are necessary for margin improvement, and failure to achieve this could limit growth in net margins and earnings.

Valuation

• The analysts have a consensus price target of $89.963 for Johnson Controls International based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $105.0, and the most bearish reporting a price target of just $79.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $26.3 billion, earnings will come to $3.1 billion, and it would be trading on a PE ratio of 23.4x, assuming you use a discount rate of 9.0%.
  
• Given the current share price of $88.81, the analyst price target of $89.96 is 1.3% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.