Is JCI A Better Pick Over Honeywell Stock?

HON: Honeywell logo

We believe Johnson Controls stock (NYSE: JCI) is a better pick than its sector peer, Honeywell stock (NYSE: HON), given its better prospects. JCI trades at a higher valuation multiple of 4.6x trailing revenues, vs. 3.7x for Honeywell, partly due to its better revenue growth. However, we believe this gap should narrow over time in favor of Honeywell, given its superior profitability and financial position, as discussed below. Still, JCI remains a better pick in our view.

Looking at stock returns, both have underperformed vis-à-vis broader markets amid rising concerns over supply-chain issues and slowing economic growth. While HON is down 7% this year, JCI is flat, and the S&P500 index is up 11%. There is more to the comparison, and in the sections below, we discuss why we believe that JCI will offer better returns than HON in the next three years. We compare a slew of factors, such as historical revenue growth, returns, and valuation, in an interactive dashboard analysis of Honeywell vs. Johnson ControlsWhich Stock Is A Better Bet? Parts of the analysis are summarized below.

1. Johnson Controls’ Revenue Growth Is Better 

  • Johnson Controls’ revenue growth has been better, with a 3.3% average annual growth rate in the last three years, compared to -0.9% for Honeywell.
  • With airlines being one of the worst-hit sectors during the pandemic, Honeywell’s aerospace revenues were weighed down during the pandemic.
  • While this trend has now reversed and Honeywell is seeing a steady rise in sales for most of its businesses – aerospace, building technologies, and performance materials business –  lower demand for personal protective equipment weighs on its safety & productivity solutions segment sales.
  • Johnson Controls also faced headwinds in 2020 due to the impact of the pandemic. However, it has seen a rebound in building products and solutions demand over the last few years. This clubbed with better price realization for its HVAC products, has bolstered its top-line growth in the recent past.
  • If we look at the last twelve-month period revenues, both Honeywell and Johnson Controls have seen sales growth of 4.8%.
  • While better price realization and pick-up in demand for aviation has led the sales growth for Honeywell in the recent quarters, strong demand trends for Johnson Controls’ commercial HVAC and fire and safety products have bolstered its top-line expansion.
  • Our Honeywell Revenue Comparison and Johnson Controls Revenue Comparison dashboards provide more insight into the companies’ sales.
  • Looking forward, Johnson Controls’ revenue is expected to grow faster than Honeywell’s over the next three years. The table below summarizes our revenue expectations for the two companies over the next three years. It points to a CAGR of 3% for Honeywell, compared to a 9% CAGR for Johnson Controls, based on Trefis Machine Learning analysis.
  • Note that we have different methodologies for companies negatively impacted by Covid and those not impacted or positively impacted by Covid while forecasting future revenues. For companies negatively affected by Covid, we consider the quarterly revenue recovery trajectory to predict recovery to the pre-Covid revenue run rate. Beyond the recovery point, we apply the average annual growth observed three years before Covid to simulate a return to normal conditions. For companies registering positive revenue growth during Covid, we consider yearly average growth before Covid with a certain weight to growth during Covid and the last twelve months.
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2. Honeywell Is More Profitable

  • Honeywell’s operating margin has slid slightly from 18.7% in 2019 to 18.1% in 2022, while Johnson Controls’ operating margin rose from 12.2% to 18.2% over this period.
  • Looking at the last twelve-month period, Honeywell’s operating margin of 19.0% fares better than 15.7% for Johnson Controls.
  • Our Honeywell Operating Income Comparison and Johnson Controls Operating Income Comparison dashboards have more details.
  • Johnson Controls’ free cash flow margin of 18% is higher than 12% for Honeywell.
  • Looking at financial risk, Honeywell fares better with its 14% debt as a percentage of equity, lower than 24% for Johnson Controls and its 12% cash as a percentage of assets higher than 5% for the latter, implying that HON has a better debt position and more cash cushion.

3. The Net of It All

  • We see that Honeywell is more profitable, has a better financial position, and is trading at a lower valuation multiple than JCI. On the other hand, Johnson Controls has seen better revenue growth.
  • Now, looking at prospects, using P/S as a base, due to high fluctuations in P/E and P/EBIT, we believe Johnson Controls is the better choice of the two, despite it being more expensive.
  • Both stocks are trading at a slightly higher multiple compared to their historical averages. Honeywell’s stock trades at 3.7x trailing revenues vs. the last five-year average of 3.5x, and Johnson Controls’ stock trades at 4.6x trailing revenues vs. the last five-year average of 4.2x.
  • Our Honeywell (HON) Valuation Ratios Comparison and Johnson Controls (JCI) Valuation Ratios Comparison have more details.
  • The table below summarizes our revenue and return expectations for both companies over the next three years and points to an expected return of 1% for Honeywell over this period vs. an 18% expected return for Johnson Controls, based on Trefis Machine Learning analysis – Honeywell vs. Johnson Controls – which also provides more details on how we arrive at these numbers.

While JCI may outperform HON stock in the next three years, it is helpful to see how Honeywell’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

Furthermore, the Covid-19 crisis has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised at how counter-intuitive the stock valuation is for Honeywell vs. Amkor.

With higher inflation and the Fed raising interest rates, among other factors, HON stock has seen a fall of 7% this year. Can it drop more? See how low Honeywell stock can go by comparing its decline in previous market crashes. Here is a performance summary of all stocks in previous market crashes.

What if you’re looking for a more balanced portfolio instead? Here’s a high-quality portfolio that’s beaten the market consistently since 2016.

Returns Jun 2023
MTD [1]
YTD [1]
Total [2]
HON Return 4% -7% 79%
JCI Return 7% 0% 55%
S&P 500 Return 2% 11% 91%
Trefis Multi-Strategy Portfolio 4% 14% 259%

[1] Month-to-date and year-to-date as of 6/8/2023
[2] Cumulative total returns since the end of 2016

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