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A Look at the New Johnson Controls

Exiting autos is a dramatic transformation, but the moat looks safe.

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 Johnson Controls (JCI) is about to no longer be an auto supplier. This summer, the narrow-moat company announced plans to spin off its automotive experience division, which made up more than half of total revenue in fiscal 2015, in the second half of 2016. The remaining parts of Johnson Controls are a leading building business focused on HVAC and a very profitable automotive battery business, both of which are undergoing product mix shifts that should lead to healthy margin expansion over the next several years. We think the company's moat not only is safe but could become stronger since the building segment's move to more products should lead to more service business. On the battery side, Corporate Average Fuel Economy regulations play right into Johnson Controls' expertise in advanced lead-acid batteries and give that business a decadelong growth runway.

Uncertainties include execution risk and market perception of the company after the spin-off, but we like management's plan to reinvent the building unit with more balance between HVAC products and HVAC service while also pursuing new technology for the company such as variable refrigerant flow.

David Whiston does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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