Companies, faced with outdated systems and facilities, are now entering a new cycle of capital expenditure to modernize and improve efficiency.

Johnson Controls (JCI) is well-positioned to benefit from this trend, offering comprehensive smart building solutions, including HVAC systems.

After selling its residential HVAC business to Bosch, the company is focused on commercial and industrial markets.

Despite this, the market has yet to fully recognize the company’s potential.

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The U.S. infrastructure, both public and private, has seen minimal investment over the past two decades. As a result, infrastructure across the country has slowly deteriorated or disappeared completely.

More than 7% of bridges are considered structurally deficient, and there is a water main break every two minutes, resulting in billions of gallons of treated water lost daily.

Corporate assets are also aging, with the average age of assets at their oldest level in over 20 years. After focusing on investment internationally over the last 15 years, corporate infrastructure in the U.S. is now historically old.

The ratio of net to gross property, plant, and equipment (PP&E) has declined from nearly 59% in 2001 to currently 54%. It will take over $500 billion to bring asset values back to 2001 levels.

This lack of investment caught up to companies during the pandemic as outdated and inefficient infrastructure struggled to meet surging demand as the economy reopened. It was a wake-up call for businesses to invest to be more resilient and responsive.

A new capex cycle is underway for corporations, marking the first significant wave of investment in facility modernization and efficiency improvements in about two decades.

Companies are looking to make their operations smarter and more efficient, and HVAC systems are one key area where they aim to save costs and enhance performance.

This is where Johnson Controls (JCI) becomes a crucial player, thanks to its suite of building solutions that include smarter HVAC systems.

The company is now positioning itself as a comprehensive provider of commercial and industrial building solutions, which includes HVAC, fire safety, controls, security, and more.

A key part of this strategy is Johnson Controls’ OpenBlue platform, launched in 2020, which offers smart building services by using data to optimize performance and reduce energy costs.

The smart building market is expected to grow significantly, and the company’s solutions are designed to take full advantage of that.

Additionally, while most of the competition sells individual equipment or limited software solutions, Johnson Controls provides end-to-end solutions for buildings.

This gives it a competitive edge, as customers can adopt additional services over time, creating long-term business relationships.

Furthermore, the company has sold its residential HVAC business to Bosch for $8.1 billion to simplify its portfolio and focus on its core commercial and industrial building solutions.

The sale accelerates Johnson Controls’ transformation into a higher-growth, more streamlined player.

The company is benefiting from strong demand for smarter building systems, with analysts expecting its Uniform return on assets ”ROA” rise to 33% over the next two years.

Despite these promising forecasts, the market hasn’t fully recognized the strength of Johnson Controls’ position. The market expects ROA to fall to 25% levels towards the end of 2028.

The sale of its residential HVAC unit will free up significant cash, which the company can use to further invest in its growth strategy.

With its comprehensive solutions for commercial buildings and its focus on smart, data-driven systems, Johnson Controls is set to capitalize on the current capex cycle.

Best regards,

Joel Litman & Rob Spivey
Chief Investment Strategist &
Director of Research
at Valens Research