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Bank of America upgraded Johnson Controls to Buy due to its exposure to AI data centers.
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Johnson Controls is a leading supplier of thermal cooling equipment and other solutions for data centers.
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The company is looking for a new CEO, which Bank of America sees as a positive catalyst.
According to a note from Bank of America this week, Johnson Controls is the stock to buy for safe exposure to the AI boom.
The bank upgraded shares of Johnson Controls to “buy” from “neutral” and raised its price target to $80 from $76. That represents a potential upside of about 15% from the stock’s Thursday close.
According to the bank, the industrial company, which sells everything from security cameras to HVAC systems, offers investors exposure to “best-in-class data center assets.”
“We see JCI as the second largest supplier of thermal equipment (~15% market share), with leading market share in chillers. JCI also sells building automation systems, security and fire protection equipment in data centers,” said Andrew Obin, an analyst at Bank of America.
Johnson Controls will generate about $4 billion in revenue from data centers this year, representing about 14% of its business. That’s more than three times the data center exposure of its closest competitors, including Trane Technologies and Carrier.
One of Johnson Controls’ best-selling products for data centers is liquid cooling systems, which help distribute and offset the massive heat generated by AI-focused servers.
“One megawatt of power delivered to a data center requires approximately 285 tons of cooling, comparable to the requirements of a 115,000 square foot commercial building,” Obin explains.
And that’s where Johnson Control’s water-cooled centrifugal chillers and computer room air handling products come in.
As for a potential catalyst for Johnson Controls, in addition to its exposure to data centers, Bank of America stressed that it is still looking for a new CEO.
“We anticipate an announcement of a new CEO before the end of the year and see this as a positive catalyst. Combined with the involvement of activist investors, we believe this potentially signals a new strategic direction for the company,” Obin said.
Finally, Johnson Controls offers investors an attractive margin of safety relative to other AI stocks that have performed strongly over the past year.
That’s because Johnson Controls shares trade at a significant valuation discount to its closest peers. Its forward price-to-earnings ratio of 18x is even lower than the broader S&P 500 valuation of about 21x.
“If JCI were hypothetically fully revalued in line with the average of these HVAC peers, that would represent a 57% higher valuation,” Obin said.
Johnson Controls shares have soared this year as investors wake up to the impact of the AI data center on the company. The shares are up 22% this year.
Read the original article on Business Insider
