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UBS Upgrades Johnson Controls, Asks: 'Would Split Highlight Margin Story?'

Related JCI
Baird Goes Neutral On Johnson Controls: 'Our Prior Thesis Has Failed To Materialize'
Benzinga's Top Upgrades, Downgrades For January 5, 2018

In a report published Thursday, UBS analyst Colin Langan upgraded the rating on Johnson Controls Inc (NYSE: JCI) from Neutral to Buy. The price target was raised from $51 to $59. The analyst believes that there is significant upside potential to the company's margins.

"We see two fundamental drivers for JCI – significant & underappreciated seating margin expansion and the BE sales recovery," Langan said. However, since the management was focused on three strategic transactions, Johnson Controls underperformed its supplier peers by about 10 percent over the past year.

With these transactions scheduled to be completed in the near future, the management can now focus on the next steps. According to the UBS report, "With limited synergies among the 3 core business and seating & BE margins underperforming peers, JCI could be pushed to split which would help realize its SOTPs value faster."

The analyst believes that the margins in Johnson Control's seating business could benefit from the company's higher exposure to the Asia Pacific than its peers. This region is expected to grow at a faster rate than any other region in the world. In addition, while most other supplier margins are touching their peak levels, the company still has room for growth.

On the other hand, "limited synergies among the divisions and below peer average margins in seating & BE are strong reasons to split the business. A split would increase transparency & accountability at the division level and help eliminate what we see as a conglomerate discount," Langan added.

Latest Ratings for JCI

Jan 2018BairdDowngradesOutperformNeutral
Dec 2017Goldman SachsDowngradesNeutralSell
Nov 2017SusquehannaDowngradesPositiveNeutral

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Posted-In: Colin Langan UBSAnalyst Color Upgrades Price Target Analyst Ratings


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