An under-the-radar industrial stock is a safe way to bet on the AI boom, Bank of America says
Yurou Guan
- Bank of America upgraded Johnson Controls to 'Buy' for its exposure to AI data centers.
- Johnson Controls is a top provider of thermal cooling equipment and other data center solutions.
- The company is searching for a new CEO, which is seen as a positive catalyst by Bank of America.
Johnson Controls is the stock to buy for safe exposure to the AI boom, according to a note this week from Bank of America.
The bank upgraded shares of Johnson Controls to "Buy" from "Neutral" and increased its price target to $80 from $76, representing potential upside of about 15% from where the stock was trading on Thursday.
The bank said the industrial company that sells everything from security cameras to HVAC systems offs investors exposure to "best-in-class data center assets."
"We find that JCI is the second-largest provider of thermal equipment (~15% market share), with leading market share in chillers. JCI also sells building automation systems, security, and fire protection equipment into data centers," Bank of America analyst Andrew Obin said.
Johnson Controls will generate about $4 billion in revenue from data centers this year, representing about 14% of its business. That is more than triple the data center exposure its closest competitors have, including Trane Technologies and Carrier.
One of Johnson Controls' best-selling products to datacenters is liquid-cooling systems, which help distribute and offset the immense heat generated by AI-focused servers.
"One megawatt of power supplied to a data center requires approximately 285 tons of cooling, similar to the requirements for a 115,000 square foot commercial building," Obin explained.
And that's where Johnson Control's water-cooled centrifugal chiller and computer room air handling products come into play.
As for a potential catalyst for Johnson Controls, aside from its data center exposure, Bank of America highlighted its ongoing search for a new CEO.
"We expect a new CEO announcement before the end of the year and view this as a positive catalyst. Combined with activist investor involvement, we believe this potentially signals a new strategic direction for the company," Obin said.
Finally, Johnson Controls offers investors an appealing margin of safety relative to other AI stocks that have been high-fliers over the past year.
That's because Johnson Controls stock is trading at a significant valuation discount relative to its closest competitors. Its forward price-to-earnings ratio of 18x is even lower than the broader S&P 500's valuation of about 21x.
"JCI hypothetically re-rating fully in line with the average of these HVAC peers would imply a 57% higher valuation," Obin said.
Shares of Johnson Controls have been on a tear this year as investors wake up to its AI data center exposure, with the stock up up 22% year-to-date.