Why Is Johnson Controls’ Stock Up 35% So Far This Year?

by Trefis Team
Johnson Controls
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Johnson Controls International plc (NYSE: JCI), is a global diversified technology company specializing in creating intelligent buildings, efficient energy solutions, integrated infrastructure and next generation transportation systems. 2019 has been a great year so far for the company, with Johnson Controls’ stock gaining almost 35% from the beginning of the year even in the absence of clear catalysts. While other industrial conglomerates such as 3M and General Electric have struggled in 2019, JCI has achieved steady growth thanks to continued demand for its HVAC technology. Moreover, JCI has remained largely immune to the impact of the U.S.-China trade war.

Trefis highlights the reasons for Johnson Controls’ Outperformance In 2019 in an interactive dashboard along with our forecast for full-year 2019. You can modify any of our key drivers to gauge the impact of changes on the company. Additionally, you can see all Trefis Industrial Data here

How has Johnson Controls’ Stock Performed With Respect To Market?

  • Johnson Controls’ stock price has increased from just above $30 at the beginning of the year to more than $41 now. This translates to a growth of roughly 35%.
  • This is significant, given the fact that the S&P 500 index has barely risen 12% over this period.
  • Notably, JCI’s closest competitor, Honeywell, has also seen its shares swell by around 32% in 2019

Why Has Johnson Controls’ Stock Outperformed?

  1. Johnson Controls has achieved steady revenue growth over recent quarters
  • Johnson Controls’ revenues have seen a steady increase (y-o-y) over the past few quarters – growing at an average rate of 2.6% since Q1 2018.
  • This growth can be primarily attributed to steady growth in its North America Building Products as well as Global Products segments:
    • North America Building Products is JCI’s largest segment accounting for roughly 37% of total revenues. This segment has continued to achieve steady growth driven by continued strength in both installation and service
    • The Global Product segment has been the largest growth driver for Johnson Controls. This segment has achieved steady organic growth led by continued strength across all platforms.
  1. At The Same Time, Johnson Controls’ Operating Expenses Have Fallen Sharply
  • Total Expenses have declined over the recent quarters, falling from $7.5 billion in Q4 2018 to $5.5 billion in Q2 2019. The steep decline was due to the sale of the company’s Power Solutions division last November.
  • The company’s ongoing restructuring plan is expected to significantly reduce annual operating costs from continuing operations, primarily the result of lower cost of sales and selling, general, and administrative expenses.
  • Such measures will result in an improvement in the margins.
  • As a result, JCI expects its EBITDA margin to expand in the range of 40 to 60 basis points mainly due to higher volumes, favorable mix, positive price cost, and synergy and productivity savings
  1. Lower Operating Expenses Coupled With Steady Revenue Growth Have Provided A Boost To The Company’s Bottom Line
  • Lower operating expenses coupled with steady revenue growth has helped Johnson Controls’ EPS increase from $0.26 in Q1 2018 to $0.57 in Q2 2019.
  • JCI has benefited from the sale of its Powers Division as revenue growth has remained stable while operating expenses have declined considerably.
  • Moreover, the sale of Power division is helping JCI to focus more on its core building solutions business. This has aided the growth in net income

Conclusion: Johnson Controls’ Stock Looks Mildly Overvalued Based On Our Forecasts For Revenues and Profits In 2019

  • JCI recently sold its Power Solutions business to capitalize on the increasing  opportunities in the building solutions industry.
  • Moreover, people are spending more towards saving energy, improving efficiency and reducing greenhouse gas emissions, which seems to favor the JCI portfolio.
  • However, we believe that the market has already priced in these expectations
  • Additionally, construction growth is expected to slow down in FY 2019. Slowing GDP growth and tighter financial and monetary conditions are expected to contribute to deceleration in the residential sector.
  • We value the company at about 14.3x projected FY’19 EPS. Based on our forecast, Johnson Controls’ adjusted EPS for fiscal 2019 is likely to be around $2.69. Using this figure with our estimated P/E ratio of 14.3x, this works out to a price estimate of $39 for Johnson Controls’ stock, which is roughly 5% below the current market price.

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