Johnson Controls Has 'Persistently Underwhelming' Growth, Cash Generation, RBC Says In Bearish Turn

Johnson Controls International JCI’s fiscal 2018 cash flow pressures and cuts to 2020 targets drove RBC Capital Markets to downgrade the stock on Thursday.

The Analyst

Deane Dray of RBC Capital Markets downgraded Johnson Controls from Sector Perform to Underperform and lowered the stock’s price target from $37 to $31.

The Thesis

The company's recent comments revealed second-quarter softness in Power Solutions, its automotive battery business, and could create incremental risk to 2018 cash flow targets, Dray said in a Thursday note. (See the analyst's track record here.) 

The company's growth and cash generation are "persistently underwhelming," and its business is highly cyclical, the analyst said.

Johnson Controls is exploring strategic alternatives for Power Solutions, but a divestiture is unlikely to unlock meaningful upside, the analyst said. 

“In our view, there are few natural buyers for a capital-intensive automotive battery business tied predominantly to [internal combustion engines].”

While the company’s 2016 merger with Tyco raised hopes of multiple expansion, cost synergies and productivity savings have “run out of steam," Dray said. 

The buildings platform — the centerpiece of Johnson Control's 2016 meger with Tyco — is unimpressive, with "tepid installation growth and [a] low-margin project backlog," Dray said. 

Price Action

Johnson Controls shares were down more than 1 percent at $34.62 at the time of publication Thursday. 

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