Backup power generation equipment company Generac Holdings (GNRC 1.70%), aircraft and defense company Textron (TXT 0.52%), and building controls and heating, ventilation, and air conditioning (HVAC) company Johnson Controls (JCI 0.60%) are all up more than 50% in 2021. But now, the question on the mind of most investors is this: Are they are still buys for 2022? Let's take a look at all three and try to answer for each.
Generac Holdings
The backup power generation company has a very bright future. The well-documented power outages in 2021 have drawn attention to the benefits of having backup power. In addition, the COVID-19 pandemic has created a new generation of workers aiming to remain at home -- more than two-thirds of Generac's sales go to the residential market.
Meanwhile, Generac is a significant beneficiary of the clean energy transition. Unfortunately, one of the big problems with renewable energy is its variability, which means users often need to invest in battery storage. That's excellent news for Generac's energy storage and power generation equipment sales.
Image source: Getty Images.
It all adds up to the company's great year, and management expects its net sales to rise by 47% to 50% in 2021. That's well and good, but as noted previously, Generac is a stock trading on a rich valuation -- and, despite the recent falls, it still trades at 33 times its estimated free cash flow for 2022. As such, the company is either going to have to blow away earnings expectations or decline from here to seem a good value.
Textron, an aviation winner
It might surprise investors to read that an aviation-focused company is one of the big winners of 2021. However, there are different markets within aviation, and Textron's focus on business jets stood it in good stead in 2021. An insight into the overlying trend is in the table below. Note that overall commercial flights are still down 18% from 2019's total, but business jets are up 47% on the same basis. Moreover, departures on Textron's Cessna aircraft are up a whopping 55% since 2019.
|
Flight Departures Seven-Day Average Dec. 17 to Dec. 24 |
2019 |
2020 |
2021 |
|---|---|---|---|
|
Commercial aviation |
99,582 |
61,151 |
81,836 |
|
Business jets |
6,999 |
7,491 |
10,256 |
|
Cessna |
2,381 |
2,526 |
3,681 |
Data source: radarbox.com.
It's impossible not to think that the pandemic shifted demand toward the business jet market. Moreover, it's expected to continue, with Honeywell's Global Business Aviation Outlook calling for a 10% increase in business jet deliveries in 2022 from 2021. Moreover, operators are forecast to replace 14% of their fleets with new business jets purchased over the next five years.
The strengthening momentum at Textron Aviation led to management raising its full-year earnings expectations every quarter this year, starting from $2.70 to $2.90 in January and reaching $3.20 to $3.30 in October.
Image source: Getty Images.
With Textron Aviation set for another strong year and Textron's industrial segment (specialized vehicles, fuel systems, and functional components) having a better 2022 on the back of increased global automotive production, the stock has good potential. Trading at less than 16 times its estimated free cash flow for 2022, Textron remains a good value.
Johnson Controls
The case for buying stock in Johnson Controls rests on the idea that building owners will seek to make their buildings operate more efficiently and in a healthier way. The pandemic and awareness of the need to keep facilities ventilated and clean is a significant driver of the latter. Meanwhile, management sees a $240 billion market opportunity for more efficient buildings over the next decade, driven by the need to reduce carbon emissions.
Buildings contribute around 40% of global greenhouse gas emissions, so they are at the front line of most companies' efforts to reduce carbon emissions. As such, retrofit demand should be strong. In addition, Johnson Controls' digital solutions will result in a step-change improvement in buildings' efficiency. Building owners can gather a mass of data and then analyze it to produce actionable insights through smart controls and web-enabled sensors.
Old and new commercial buildings will need retrofits to meet emission standards. Image source: Getty Images.
Management sees mid-single-digit revenue growth, with earnings growing by double digits over the next few years. It's a view shared by Wall Street analysts, who see the company's operating earnings growing at a compound annual growth rate of 15% to 2024. Based on estimates for free cash flow of $2.4 billion in 2022, Johnson Controls trades at 22 times next year's free cash flow. That's a reasonable valuation for a company with such strong long-term growth prospects.
