This HVAC company looks like a better bet on Johnson Controls stocks – Trefis


We think that Trane Technologies shares (NYSE: TT), a heating, ventilation and air conditioning (HVAC) systems, building management systems and controls company, is currently a better choice than its industry counterpart. Johnson Controls Actions (NYSE: JCI), although Trane Technologies is the more expensive of the two. Trane Technologies is trading at around 3.3 times its revenue, compared to 2.3 times for Johnson Controls. Although both companies have experienced a recovery in demand lately, Trane Technologies’ financial performance has been better in recent years. However, there is more to the comparison. Let’s go back to take a closer look at the relative valuation of the two companies by looking at historical revenue growth as well as operating margin growth. Our dashboard Johnson Controls v Trane Technologies: industry peers; Which action is a better bet? has more details on this. Parts of the analysis are summarized below.

1. The revenue growth of Trane Technologies has been better

Trane Technologies’ revenue growth over the past twelve months has been slightly higher than that of Johnson Controls (9% vs. 3%), given a rebound in demand for residential air conditioning products. It should be noted that the activity of Johnson Controls had a more profound impact during the pandemic, compared to Trane Technologies, given a decline in non-residential construction activity, particularly in the North America region, which is the largest segment, accounting for almost 40% of the company’s total sales.

Longer term, Johnson Controls’ revenue for the past three years increased at a CAGR of -0.8%, compared to -4.3% for Trane Technologies. Note that Trane Technologies was formed after the split of the Ingersoll-Rand industrial segment and the subsequent merger with the Gardner Denver subsidiary, thus impacting the overall variation in sales. If we looked at Adjusted Revenue, it actually increased at a CAGR of 3.7%.

Now that economies are gradually opening up, demand for construction products, including HVAC, is expected to increase in the future. In fact, Johnson Controls forecast revenue growth of 6% to 7% CAGR through fiscal 2024. Our Johnson controls income The dashboard provides more information about the company’s revenue. Trane Technologies is also expected to experience steady revenue growth with strong demand for its HVAC products and services.

2. The margins of Trane Technologies are higher

Similar to the pattern seen in revenue growth, Trane Technologies ‘operating margin of 14.4% over the past twelve months is slightly better than Johnson Controls’ 10.0%, and it compares to the numbers of 12 , 6% and 4.4% observed in 2019, before the pandemic, respectively. Even if we look at the average operating margin for the past three years, the 12% figure for Trane Technologies is better than 5% for Johnson Controls. Overall, for both companies, margins are up, but Trane Technologies’ current and historical operating margins have been better compared to Johnson Controls.

The net of everything

Now that nearly 60% of the U.S. population is fully vaccinated against Covid-19, with a pickup in overall economic activity, demand for non-residential construction solutions is expected to increase in the future, bodes well for Johnson Controls. Both companies will benefit from the continued demand for HVAC.

That said, Covid-19 is proving more difficult to contain than initially thought, due to the spread of more contagious viral variants and infections in some geographies, including Europe, are higher than they were not a few months ago. Concerns over Omicron have scared the markets as a whole with several confirmed cases in the United States as well. If there is another significant spike in the new variant’s Covid-19 cases, it will disrupt the economic recovery and impact sales as well as profit growth for both companies.

While Johnson Controls’ current valuation is surely more attractive than that of Trane Technologies, with JCI shares trading at around 2.3x rolling earnings, versus 3.3x for TT, the latter has demonstrated better earnings growth. and it is more profitable. Not only that, even if we looked at financial risk, Trane Technologies ‘11% debt as a percentage of equity is better than 13% for Johnson Controls, and also, Trane Technologies’ 16% cash as a percentage of assets. are also better than the 3% figure for Johnson Controls, implying that TT has a better debt and cash position.

Overall, Trane Technologies trumps Johnson Controls in most important measures for investors and we believe this valuation gap between the two companies is broadly justified. In fact, going forward it is likely that the valuation spread of these two companies will persist for the foreseeable future and Trane Technologies could continue to outperform with its better growth prospects and lower risk.

While TT stock may see higher levels, 2020 has created many price discontinuities which may provide some exciting trading opportunities. For example, you will be surprised at how counterintuitive stock valuation is for Trane Technologies vs. Logitech.

Wondering how Johnson Controls peers rank? To verify Johnson Controls Comparison of stocks with its peers to see how the JCI stock compares to its peers on important metrics. You can find other useful comparisons at Peer comparisons.

What if you were looking for a more balanced portfolio instead? here is a quality portfolio which has been regularly beating the market since the end of 2016.

Return Dec 2021
MTD [1]
YTD [1]
Total [2]
JCI Return 3% 65% 86%
TT return 4% 31% 154%
Return of the S&P 500 -1% 22% 105%
Trefis MS Portfolio Return -1% 43% 290%

[1] Monthly cumulative and annual cumulative at 12/03/2021[2] Total cumulative returns since 2017

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