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Demand Heats Up For Johnson Controls Chillers

Posted: Jul 17, 2008 15:42 PM by Gregory S. Davis

Filed Under: Economics

Tickers in this Article: JCI, MGA, UTX, XIDE

A hot day in the Southern United States is a lot like a cold day in Canada. People move from their temperature-controlled homes, to their temperature-controlled cars, to their temperature-controlled offices, and then repeat the process in reverse when the working day is done. The goal is to spend as little time as is possible in the uncomfortable "real world".

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Of course, this creates a strain on energy grids, and increasing attention has turned to limiting greenhouse gases and improving the heating and cooling efficiency of commercial buildings within and outside of the

U.S

. Globally, heating ventilation air conditioning (HVAC) equipment demand is expected to rise by 5% annually through 2010, according to market research firm Reportlinker.com. Efficiency solutions from companies like Johnson Controls (NYSE:JCI) offer investors an entry point into the growing commercial building temperature control market. (Find out how changes in demand can affect what a business is worth, in our Economics Basics Tutorial.)

Chiller Keep the Games Cool
Johnson Controls is recognized as leader in efficient HVAC systems for buildings and industrial applications. The company's YORK Chillers have been selected for use in multiple venues during the 2008 Olympics in Beijing, China. YORK Chillers have also been requested to battle the heat in the Middle East. Johnson Controls has won contracts from cooling companies Qatar Cool and Tabreed, the Middle East's largest cooling company, to install its HVAC units in multiple locations in the United Arab Emirates. One high profile win for Johnson Control's is a contract for the Burj Dubai, the largest cooling plant in the development, which also includes one of the world's tallest buildings. A recent win is for a contract to supply cooling units to a mixed used development in the Kingdom of Bahrain.

Valuation
Johnson Controls recorded record revenues of $9.4 billion for the second quarter ended March 31, aided by an 11% increase in building efficiency sales. The company sports an attractive PEG ratio below 1, suggesting that the stock is currently undervalued. Coupled with a low price-to-sales ratio of 0.46 Johnson Controls definitely deserves investor attention. (Learn to use ratios to evaluate a company's performance in our Ratio Analysis Tutorial.)

Johnson Controls is down nearly 22% since the beginning of the year. The stock experienced a strong upward surge in price after its 3-for-1 stock split at the beginning of October of last year, but since then the stock has fallen sharply due to declining sales primarily in its automotive segment.

Competition
In the HVAC market Carrier Corporation, a subsidiary of United Technologies (NYSE:UTX) competes directly with Johnson Controls. Johnson Controls' largest revenue generator segment, Automotive Experience, and its smallest, Power Solutions, open it up to a wide array of competitors. In the Automotive segment Magna International (NYSE:MGA) also designs automotive interiors and has attractive valuation ratios, but its stock performance has lagged behind the S&P 500. In the Power Solutions segment Exide Technologies (Nasdaq:XIDE) is also at work on improving the performance of battery power and could be one to watch for the future.

Conclusion
We can all agree that cool temperatures make for better work and play environments. With growing global demand for HVAC supplies and services, trusted names like Johnson Controls are likely to keep future stock returns out of negative territory.

By Gregory S. Davis

Gregory S. Davis is the owner of G. Davis Capital, a Registered Investment Advisor with the state of North Carolina dedicated to providing independent investment research and education. His core methodology for choosing investments includes going against emotion eliciting headlines while focusing on asset diversification. G. Davis Capital also publishes the ETF education website, ETFReady.com . Gregory is a graduate of the Wharton School of Business and he has received an MBA from Bowie State University.

Filed Under: Economics

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