Johnson Controls Oversold At $28?

by Trefis Team
Johnson Controls
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Despite almost a 30% decline in Johnson Controls’ (NYSE:JCI) stock since the beginning of this year, at the current price of around $28 per share, we believe Johnson Controls hasn’t bottomed out yet. Why is that? The key is Johnson Controls’ stock is 20% lower than it was at the beginning of 2018, a little over 2 years ago, led by a decline in earnings, and yet its P/E multiple is higher compared to levels seen over the recent years. Our dashboard, ‘What Factors Drove -20% Change In Johnson Controls Stock Between 2017 And Now? provides the key numbers behind our thinking, and we explain more below.

Some of the Johnson Controls’ stock price decline over the last 2 years is justified due to its lackluster results. The company’s revenues were down 20%, as the company divested its power business. Adjusting for power business, revenues were actually up 5%. Adjusted net income margin also declined 100 bps from 8.1% in 2017 to 7.1% in 2019. Earnings (Non-GAAP) growth on a per share basis came in at a negative 25%, though it was primarily due to power business divestiture. If we apply same company-wide adjusted net income margin on adjusted revenues, still earnings were down 1%. EPS was partly aided by massive share buy-backs. Specifically, the company has invested about $6.9 billion in repurchases in the last three years, resulting in about -7.4% lower shares outstanding. While Johnson Controls did have about $1 billion in cash as of the last report, the company has recently announced suspension of its share repurchase program.

Finally, Johnson Control’s P/E ratio grew from 13.7x in 2017 to 20.6x by the end of 2019. While Johnson Control’s P/E is down to about 14.6x now, given the volatility of the current situation, there is an additional possible downside for Johnson Control’s multiple when compared to levels seen in the past years – P/E of 13.7x at end of 2017, and 10.1x in 2018.

So what’s the likely trigger and timing to this downside?

The global spread of coronavirus has led to lockdown in various cities across the globe, which has affected industrial and economic activity. The COVID-19 pandemic is expected to have significant repercussions on the global economy, which could well go into recession. For a company such as Johnson Controls, which primarily provides heating, ventilation, and air-conditioning and mechanical systems among other products and solutions for buildings, it could see its business decline. While the company saw only a 6% decline in fiscal Q2 sales, we believe the company’s Q3 fiscal 2020, which ends in June, will confirm  a significant hit to its revenues.

If there isn’t clear evidence of containment of the virus at the time of the Q3 fiscal 2020 earnings announcement, we believe the stock will see its P/E decline from the current level of 15x to levels of around 13x seen in 2017, which combined with a reduction in revenues and margins could result in the stock price shrinking to as low as $20.

Apart from Johnson Controls, among other industrial companies, 3M could outperform after a 30% decline since 2017.

Our dashboard 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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