Strong Recurring Revenue Stream for Johnson Controls International plc (NYSE:JCI)

January 24, 2017

Co-Portfolio Manager Jennifer Chang of Schafer Cullen Capital Management says Johnson Controls International plc Ordinary Share (NYSE:JCI) has a strong recurring revenue stream with its building control systems. Additionally, she says the company should profit from its fuel-efficient battery business.

Johnson Controls runs building control systems, the HVAC systems — heating, ventilation and AC — for many commercial and industrial companies. They recently bought Tyco, which added a strong fire and safety business to their operations, a natural adjacency.

Their model is quite attractive; they sell upfront equipment at high margins and then sign long-term maintenance agreements with customers, a strong recurring revenue stream. We talked to people in the industry about whether that combination makes sense, and it appears that aggregating a lot of these products and functions, and housing it in one company is where the industry is heading. There are a lot of cost-cutting and cross-selling opportunities as well.

The other part of the company that we like is their battery business. They have a 70% market share in the hybrid start-stop battery market. That specific battery is about 5% to 10% more fuel-efficient than a traditional lead-acid battery but also twice as profitable for Johnson Controls. If you think about the rolling federal fuel-mileage standards that are taking place over the next couple of decades, these batteries help auto OEMs improve their fuel-mileage efficiency and meet those standards. We expect accelerating adoption, and recently, Ford (NYSE:F) and GM (NYSE:GM) have said that by 2020, they want 100% of their vehicles using hybrid start-stop batteries.

Jennifer Chang