Johnson Controls Added To Goldman's Conviction Buy List: A 'Franchise With Improving Fundamentals'

Goldman Sachs has added Johnson Controls International plc Ordinary Share JCI to its Conviction Buy List following the completion of Adient spinoff.

The brokerage’s bullish thesis on Johnson Controls is based on improving fundamentals, EBIT growth from cost savings and reasonable valuation.

“After a 3Q EPS season where growth stabilization remains scarce, JCI stands out as a self-help story with inexpensive valuation, and we are more confident that cost savings can support most of our LDD segment EBIT CAGR over the next three years,” analyst Joe Ritchie wrote in a note.

Ritchie noted that several aspects of the shares are underappreciated, especially the Power Solutions business given its dominant market and high-teens EBIT margins versus peers’ low-teens margins.

“Three-fourths of our LDD segment EBIT CAGR is fueled by synergies from the TYC merger, so better organic incrementals could drive upside,” Ritchie noted.

The analyst estimates the company’s targeted $900 million of cost savings has a PV of about $0.65-$0.70/share.

However, Ritchie cut his FY 2017 EPS view to $2.70 from $2.80 to reflect potential stranded costs from the combination, but maintained his FY 2018/2019 EPS estimates of $3.15/$3.60.

Recently, Jim Cramer said he sees a tremendous value in the Johnson Controls over the long term.

Ritchie maintained his price target of $46.