After 65% Move Johnson Controls Stock Looks Fully Priced

After a 65% rise since the March 23 lows of this year, at the current price of around $40 per share we believe Johnson Controls’ stock (NYSE: JCI) has reached its near term potential. JCI stock has rallied from $24 to $40 off the recent bottom compared to the S&P which moved 50%, with the resumption of economic activities as lockdowns are gradually lifted. JCI stock is also up 41% from levels seen in early 2019.

JCI stock has fully reached the level it was at before the drop in February due to the coronavirus outbreak becoming a pandemic. This seems to make it fully valued as, in reality, demand and revenues will likely be lower this year than last year.

Some of this rise of the last 2 years is justified by the roughly 2% growth seen in Johnson Controls’ revenues from 2018 to 2019, which clubbed with a 12% net margin expansion from 6.4% to 7.1% translated into a 15% growth in net income on an adjusted basis.

While the company has seen steady revenue and earnings growth over recent years, its P/E multiple has also expanded. We believe the stock is unlikely to see significant upside after the recent rally and the potential weakness from a recession driven by the Covid outbreak. Our dashboard, “What Factors Drove 41% Change in Johnson Controls Stock between 2018 and now?“, has the underlying numbers.

Johnson Controls’ P/E multiple changed from 18x in 2018 to 20x in 2019 based on trailing adjusted earnings. While the company’s PE is now at 21x given the recent rally, there is a downside when the current P/E is compared to levels seen in the past years, P/E of  18x at the end of 2018.

So what’s the likely trigger and can the stock stick to recent gains?

The global spread of coronavirus has led to several restrictions in various cities across the globe, which has affected industrial and economic activity. The Covid-19 pandemic is also having significant repercussions on the global economy. 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 has seen its sales drop in high teens (percentage) in fiscal Q3 (fiscal ends in September). With the economy barely limping back to normalcy following Covid-19 related shutdowns, and unemployment at multi-decade highs in the U.S., the real estate sector is expected to take a hit. The project timelines and cash flows for real estate developers are affected due to the halt in certain construction activities.

That said, the company is working on new products that are crucial in the current environment. It recently launched a contactless skin temperature scanning solution for buildings. Over the coming weeks, we expect continued improvement in demand and subdued growth in the number of new Covid-19 cases in the U.S. to buoy market expectations. Following the Fed stimulus — which set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view. With investors focusing their attention on 2021 results, valuations become important in finding value. Though market sentiment can be fickle, and evidence of a sustained uptick in new cases could spook investors once again. As such, the recent gains in the stock may stick, but any significant upside from the current price is unlikely in our view. We estimate Johnson Controls Valuation to be $36 per share.