A Recession Could Take Johnson Controls Stock Back To $20?

by Trefis Team
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Johnson Controls
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Johnson Controls’ stock is down ~22% from levels of around $40 in early February to $30 currently (April 14), as the spread of the novel Coronavirus rattles the stock markets and the broader economy. Johnson Controls has underperformed the S&P thus far through the crisis, likely due to fears of the economy could slip into a recession, hurting demand for the real estate market, and the company’s building solutions. We estimate that Johnson Controls’ stock price could decline to levels of around $20 if its revenues fall by 17% vs fiscal 2019, its margins contract by around 100 bps, and its valuation multiple falls to levels of around 14x, down from around 20x at the end of 2019. Below, we summarize a possible downside case for Johnson Controls. You can modify key drivers to arrive at your own price estimate for the company. Our dashboard, ‘Johnson Controls Headed Back To $20?‘ discusses an outlier case for fiscal 2020 and fiscal 2021 with expectations for building products & systems and services businesses.

#1. Johnson Controls’ Total Revenues could decline to $20 billion by FY’21, down from $24 billion in FY’19, if sales of building products & solutions decline.

  • This assumes that the company’s revenues decline by about 17% this fiscal, and by 2% over FY’21, on account of weaker demand.
  • With the global economy going into recession, the global real estate market is expected to take a hit in 2020, both residential and commercial. Johnson Controls provides heating, ventilation, and air-conditioning systems for buildings.
  • With the real estate market expected to weaken, Johnson Controls will likely see lower shipments, thereby putting pressure on the company’s top line in 2020. Johnson Controls’ Services segment could also see decline, amid lower demand for building products.
  • Home sales are expected to decline in mid-single-digits to 5.1 million in 2020, while prices are expected to drop by an annual rate of 0.4% over the next two years.
  • The decline seen in 2019 can be attributed to the company’s divestiture of its power business, which garnered $8.0, $7.3, and $6.7 billion in 2018, 2017, and 2016, respectively.

#2. Johnson Controls Adjusted EPS could decline to $1.46 in FY’20, from $1.96 in FY’19

  • This assumes that the company’s net income margin shrinks 110 bps to 6.0% in FY’20 and FY’21.
  • Also, Johnson Controls’ share count declining from 874 million in 2019 to 800 million in FY’21.
  • As of Q1 FY’20, the company still has $3.9 billion reserve for share repurchases under the current buyback program.

#3. Arriving at Johnson Controls valuation

  • Johnson Controls stock could fall to levels of $20, if its P/E Multiple declines to about 14x with EPS falling to about $1.46 in FY’20.
  • Johnson Controls’ P/E has seen sharp declines in the past. For instance, over the 2008 crisis, it saw its P/E decline from 6x in 2007 to 2x in 2008.

Our other analyses on COVID-19, including forecasting US COVID-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus. Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture. Additionally, the complete set of coronavirus impact and timing analyses is available here.

 

See all Trefis Price Estimates and Download Trefis Data here

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