What happened
Shares in heating, ventilation, and air-conditioning (HVAC) and building systems company Johnson Controls (JCI 1.02%) were down by about 3% by 10 a.m. ET today. The move is partly due to a general market sell-off driven by the Federal Reserve's "hawkish" commentary on fighting inflation. In plain English, Federal Reserve Chair Jerome Powell signaled a willingness to raise rates further to combat inflation, and he also reiterated the target of 2% inflation.
That news is especially relevant for Johnson Controls because, earlier in the week, the stock had received a downgrade from an analyst at a heavyweight company, Bank of America's Andrew Obin, based on potential weakness in the nonresidential construction market.
So what
While there's clear evidence of a slowdown in residential HVAC, the nonresidential market has outperformed, and investors are willing to pay a premium for companies with extra exposure to nonresidential markets, such as Johnson Controls and AAON. That said, and as Obin notes, nonresidential markets tend to follow residential markets. The latter is sensitive to interest rate rises, making buying or remodeling a home more expensive.
Now what
Obin's previous target price of $85 was significantly above the consensus of $69, and his new target price of $72 still implies a double-digit upside to the stock. Meanwhile, all it will take is some better data on inflation, and the outlook for construction spending -- and Johnson Controls -- will improve.
Also, it's important to note that the current data on nonresidential HVAC spending indicates strength, and there are powerful secular trends (net zero emissions compliance, building efficiency gains, the drive toward healthy buildings) driving the nonresidential market. Thus, it's too early to count out Johnson Controls just yet.
