Shares in Johnson Controls (JCI 0.31%), a building products and heating, ventilation, air conditioning, and refrigeration (HVAC) company, rose 10.2% in March, according to data provided by S&P Global Market Intelligence. The move comes after two pieces of newsflow, which could be construed as plusses for the company.
A competitor updates
Siemens Smart Infrastructure, part of Siemens AG, is named a large competitor of Johnson Controls in the latter's Securities and Exchange Commission (SEC) filings. As such, it's always interesting when its management comments on trading conditions, as it did in March during the Bank of America Industrials Conference.
Siemens CFO Ralf Thomas noted weakness in its automation business. Still, he said that the smart infrastructure business was tracking toward the high end of management's expectations in the quarter -- a good indication for Johnson Controls' end market prospects.
Restructuring Johnson Controls
According to Reuters, the company is working with advisors over a potential sale of some of its residential and light commercial HVAC businesses, with Robert Bosch, Samsung, and Lennox International discussed as possible suitors for assets worth more than $6 billion.
Such a deal would see Johnson Controls refocusing on its core commercial HVAC and fire and security products.
Image source: Getty Images.
Why a sale would make sense
Investors would welcome a sale because the main attraction of buying the stock is its exposure to the theme of commercial building owners retrofitting their HVAC and building systems to improve efficiency and meet their net-zero emissions targets. The company's suite of artificial intelligence (AI)-driven digital applications on its OpenBlue platform can significantly improve building efficiency and save costs.
Given that the residential and light commercial HVAC businesses only contributed 10% of sales in 2023, and are not a core part of the long-term growth drivers discussed, a deal would make sense and enhance the stock's investment proposition.
Turning to more immediate matters, Johnson Controls is evaluating the impact of a cyber attack on its operations that restricted its growth in the first quarter of 2024. In addition, its global product sales are going through a weak patch as dealers work through inventory built up during the supply chain crisis. For reference, dealers rushed to build inventory as lead times (the time it takes an order to be delivered) were extended, and they wanted to ensure they had products available for customers.
Now that lead times have normalized, dealers are running down inventory, meaning Johnson Controls is temporarily weak. Management believes its sales growth will notably increase in its financial second half -- something to look out for when the company releases its second-quarter earnings results.
