1 Unusual Way to Play AI Data Centers

As energy stocks have faded, artificial intelligence has emerged as the force behind the stock market this year. While clean energy and AI might seem like two very distinct technologies, there is a company that operates at the intersection of both of those innovations.

Johnson Controls (NYSE: JCI) is a heating and air company that retrofits commercial buildings to be more energy efficient and to lower carbon emissions.The company also makes the powerful HVAC solutions required to control the climate inside supercharged AI data centers.

The AI component has been integral to the stock’s rally after a few years where the company missed earnings expectations and had leadership concerns. Now, Johnson Controls appears to have found its flow and this year alone JCI share price is up over 35%.

Why Did JCI Stock Rise?

Though there are plenty of positives for Johnson Controls, the company’s earnings struggles aren’t over.

In the fiscal third quarter of 2024, revenues of $7.2 billion rose 1% year-over-year. However, the top line lagged analysts’ expectations by 1.5%, carrying on a trend of sales underperformance over the last four quarters.

Net income of $975 million fell by 7% from Q3 23 but diluted earnings per share of $1.45 beat EPS estimates by 5.2%. Johnson Controls was also able to increase its orders by 5% year-over-year, and the company had free cash flow of $922 million.

Despite the earnings beat, Johnson Controls lowered its guidance for full fiscal year 2024. The company now expects revenue growth of 3%, when sales were previously forecasted in the mid single-digits. Management also lowered the adjusted EPS estimates from between $3.60 and $3.75 to between $3.66 and $3.69.

“Our third quarter results exceeded expectations with robust margin expansion, strong free cash flow generation, and continued Service demand,” said George Oliver, Chairman and CEO of Johnson Controls, in the earnings release. “We have increased our backlog to record levels, building on our strong momentum driving profitable growth.”

Will Johnson Controls Stock Go Back Up?

A revenue miss and tightened guidance doesn’t usually drive a stock higher, but JCI has gained steadily since the company reported its results.

This can be in part attributed to the slimming down of the overall company. For example, Johnson Controls divested itself of its residential and light commercial HVAC and Air Distribution Technologies businesses in the quarter, segments which represented roughly 20% of sales.

The company will now focus all its efforts on the commercial sector. In addition to retrofitting HVAC systems, Johnson Controls also offers a cloud-based OpenBlue software suite which allows owners to reduce energy use, identify productivity gaps, and improve security.

The bid for commercial business seems like a winner based on the number of organizations who have set objectives to become “net zero” on greenhouse gas emissions. The U.S. is pushing for commercial buildings to reduce their carbon emissions by 50% by 2032, and reach net zero by 2045.

Johnson Controls will also benefit from the continued demand for HVAC systems that can support AI data centers. AI requires massive amounts of energy to operate, and Johnson Controls is one of the few companies poised to meet the demand for AI climate-control systems.

One of the concerns about Johnson Controls has been its leadership, especially after a series of revenue misses. George Oliver has been CEO of Johnson Controls since 2017, but he announced his retirement in Q3. The company has already laid out its succession plan for Oliver, and investors have been receptive to a change in leadership so far.

JCI Analysts Ratings

Due to the restructuring efforts and the company’s potential in several emerging spaces, analysts at JPMorgan and Jefferies raised their price targets on JCI.

So, what is the JCI stock analysis? Wall Street analysts are evenly divided with 12 believe of the 24 rating it as a Buy and the balance rating is as a Hold.

The highest forecast has the stock jumping 23% to $95 over the next 12 months. The average price target is $82.37, which would be a 6.6% increase from where the stock currently trades. There isn’t a Sell rating on JCI, but the lowest forecast has the stock dropping 17.2% to $64.00 over the next 12 months.

Is Johnson Controls Stock Undervalued?

A 10 year discounted cash flow forecast analysis pegs fair value for Johnson Controls at $83 per share.

While analysts generally agree that Johnson Controls stock should keep on its upward trajectory, the stock’s price-to-earnings multiple of 31.9 doesn’t make JCI appear undervalued when forecasted earnings growth of 13.9% annually for the next 5 years is factored in. Competitor Lennox International has a P/E of 33.3. JCI trades at just 1.8x sales versus 4.3x for Lennox.

Johnson Controls has been friendly to shareholders for some time, and the company continued that trend by paying dividends of roughly $249 million in Q3. The stock pays investors 1.77% which corresponds to an annual payout of $1.48 per share and given the 58% payout ratio it’s likely to be safe for some time. Management also spoiled investors via a 6 million share buyback in Q3 that resulted in an outlay of $402 million.

Is Johnson Controls Stock a Buy or Sell?

For the most part, analysts are on the same page that Johnson Controls is a strong buy with 10 analysts upgrading their earnings estimates for the quarter and a price target of $87.23 per share.

Johnson Controls had a strong year despite struggling to meet estimates, lowering fiscal year guidance, and changing leadership. After a restructuring and an impending change at the helm, two major analysts have shifted to buy ratings on the stock.

JCI is an intriguing stock because of the company’s position in two emerging fields. Both the clean energy and artificial intelligence industries are expected to grow at a fast clip over the next decade, and there are few companies poised to deliver solutions for both fields.

The company appears undervalued based on its P/S value, and Johnson Controls pays a solid dividend. Even after a year where the stock jumped over 45%, there still appears to be room for JCI to rise given its strong positioning.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.