Baird Goes Neutral On Johnson Controls: 'Our Prior Thesis Has Failed To Materialize'

Johnson Controls International plc JCI received a Friday downgrade from Baird, with the firm saying the HVAC company is trading at fair value.  

The Analyst

Baird Equity Research's Timothy Wojs downgraded Johnson Controls from Outperform to Neutral and decreased the price target for the stock from $48 to $42.

The Thesis

The stock is fairly valued in light of slower growth, lower free cash flow conversion and choppier execution, Wojs said. (See the analyst's track record here.) 

Baird's prior thesis, based on synergy-led double-digit EPS growth and improved FCF, has failed to materialize, Wojs said. The analyst now sees the scope for valuation re-rating as being more limited.

At 11x 2018E EPS, the stock trades at a modest discount to the median multiples of several different peer sets, the analyst said. 

Johnson Controls ranks in the bottom quartile in organic growth, EPS growth and FCF conversion among its peers, Wojs said. 

Johnson Controls is inexpensive on EPS, but the relative FCF yield isn't as compelling given the lower levels of conversion, the analyst said. Wojs said he expects that the stock could stay range-bound in the near term, as Johnson Control's guidance is weighted toward the second half of the year.

Investors might take a wait-and-see approach, the analyst said. On the upside, recent cold weather should be a benefit for JCI's power segment due to battery replacement, he said. 

The analyst lowered the price target for the stock to $42, while he said he sees JCI's risk-reward reward in a range of $33 to $54. The risk-reward is skewed 2-to-1 on an upside-to-downside basis, Wojs said, adding that the company needs better execution in order to realize its upside potential.  

The Price Action

The stock fell 3.59 percent Friday, closing at $38.42. Johnson Controls lost almost 6.50 percent, adjusted for dividends, in a year.

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