UBS Upgrades Johnson Controls, Asks: 'Would Split Highlight Margin Story?'

In a report published Thursday, UBS analyst Colin Langan upgraded the rating on Johnson Controls Inc (NYSE: JCI) from Neutral to Buy. The price target was raised from $51 to $59. The analyst believes that there is significant upside potential to the company's margins.

"We see two fundamental drivers for JCI – significant & underappreciated seating margin expansion and the BE sales recovery," Langan said. However, since the management was focused on three strategic transactions, Johnson Controls underperformed its supplier peers by about 10 percent over the past year.

With these transactions scheduled to be completed in the near future, the management can now focus on the next steps. According to the UBS report, "With limited synergies among the 3 core business and seating & BE margins underperforming peers, JCI could be pushed to split which would help realize its SOTPs value faster."

The analyst believes that the margins in Johnson Control's seating business could benefit from the company's higher exposure to the Asia Pacific than its peers. This region is expected to grow at a faster rate than any other region in the world. In addition, while most other supplier margins are touching their peak levels, the company still has room for growth.

On the other hand, "limited synergies among the divisions and below peer average margins in seating & BE are strong reasons to split the business. A split would increase transparency & accountability at the division level and help eliminate what we see as a conglomerate discount," Langan added.