Johnson Controls (JCI): A stock Warren Buffett should own

By J. Royden Ward, Chief Analyst, Cabot Benjamin Graham Value Investor
From Cabot Wealth Advisory 11/23/15 Sign up for Cabot Wealth Advisory—it’s free!

A stock that I think Warren Buffett should own is Johnson Controls. The stock is undervalued with a sufficient margin of safety, high profit margin and the company manufactures products that are easy to understand. Berkshire doesn’t own the stock yet, but I think he will likely buy a big chunk soon. My suggestion: Buy now before Mr. Buffett drives the stock substantially higher!

Here’s my analysis on the stock.

Johnson Controls (JCI: Current Price 46.02) operates in three business segments: Buildings, Automotive and Power Solutions. Johnson Controls was founded in 1885 and is headquartered in Milwaukee, Wisconsin.

The Building Efficiency segment (33% of sales) is engaged in designing, producing, marketing and installing heating, ventilating and air conditioning (HVAC) systems, building-management systems, automatic temperature controls, building security and mechanical equipment. Johnson also provides technical services, energy management consulting and property management of entire real estate portfolios.

The company’s Automotive Experience business (51% of sales) provides interior systems using the company’s design and engineering expertise. Johnson supplies seating, interior systems and door systems for more than 30 million vehicles annually.

The Power Solutions business (16% of sales) supplies advanced lead-acid automotive batteries for every type of passenger car, light truck and utility vehicle. The company also makes lithium-ion batteries to power hybrid and electric vehicles.

Johnson recently completed the sale of a fourth division, Workplace, to CBRE Group for $1.5 billion. The company created a 10-year deal with the buyer, CBRE Group, to sell HVAC equipment and building automation systems to CBRE’s property owners. That could be big, as CBRE is the world’s largest commercial real estate services firm serving owners, investors and occupants.

In addition, Johnson will split into two companies sometime in 2016. One company will operate the Automotive segment, and the other company will control the Building and Power Solutions segments. Management is already cutting costs and improving efficiency in preparation for the split. Lastly, the company will likely use part of the $1.5 billion sale proceeds from its CBRE deal to enhance storage battery research and development, and to possibly acquire a company or two to augment the proposed two new companies.

Johnson’s sales will decrease about 10% during the next 12 months because of the sale of its Workplace division. However, EPS will rise 8% to $3.80 during the 12 months ending September 30, 2016. At 12.9 times current EPS with a dividend yield of 2.3%, JCI shares are clearly undervalued after factoring in the firm’s bright prospects.

I expect JCI to reach my Minimum Sell Price target within one year. I recommend buying at the current price.

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