After 75% Rally Johnson Controls Stock Looks Fully Valued

by Trefis Team
Johnson Controls
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We believe there may be better places for your money than Johnson Controls stock (NYSE:JCI) at the present time. JCI trades at $41 currently and it has gained 3% in value so far this year. It traded at a pre-Covid high of $41 in February, and it is at the same level now. Also, JCI stock has gained 77% from the low of $23 seen in March 2020, as the Fed stimulus largely put investor concerns about the near-term survival of companies to rest. 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 has also taken a hit. The project timelines and cash flows for real estate developers are affected due to the halt in certain construction activities, impacting Johnson Control’s business. While the situation is changing on the ground with the gradual opening up of economies, in view of the strong rally in JCI stock since late March, we believe that the stock has little room for growth in the near future. Our conclusion is based on our detailed analysis of Johnson Controls stock performance during the current crisis with that during the 2008 recession in an interactive dashboard analysis.

2020 Coronavirus Crisis

Timeline of 2020 Crisis So Far:

  • 12/12/2019: Coronavirus cases first reported in China
  • 1/31/2020: WHO declares a global health emergency.
  • 2/19/2020: Signs of effective containment in China and hopes of monetary easing by major central banks helps S&P 500 reach a record high
  • 3/23/2020: S&P 500 drops 34% from the peak level seen on Feb 19, as Covid-19 cases accelerate outside China. Doesn’t help that oil prices crash in mid-March amid Saudi-led price war
  • From 3/24/2020: S&P 500 recovers 48% from the lows seen on Mar 23, as the Fed’s multi-billion dollar stimulus package suppresses near-term survival anxiety and infuses liquidity into the system.

In contrast, here’s how Johnson Controls and the broader market performed during the 2007/2008 crisis.

Timeline of 2007-08 Crisis

  • 10/1/2007: Approximate pre-crisis peak in S&P 500 index
  • 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
  • 3/1/2009: Approximate bottoming out of S&P 500 index
  • 1/1/2010: Initial recovery to levels before accelerated decline (around 9/1/2008)

Johnson Controls vs S&P 500 Performance Over 2007-08 Financial Crisis

JCI stock declined from levels of around $35 in September 2007 (pre-crisis peak) to levels of around $16 in March 2009 (as the markets bottomed out), implying JCI stock lost 55% from its approximate pre-crisis peak. It recovered post the 2008 crisis, to levels of about $29 in early 2010, rising by 82% between March 2009 and January 2010. In comparison, the S&P 500 Index saw a decline of 51%, followed by a recovery of 48%.

Johnson Controls’ Fundamentals in Recent Years Look Strong

Johnson Controls Revenues grew a strong 142% from $9.9 billion in 2015 to $24.0 billion in 2019, primarily led by its merger with Tyco. With the strong growth in revenues, the company’s margins also expanded from 9% to 24%, resulting in a 175% EPS growth from $2.36 in 2015 to $6.49 in 2019 on an adjusted basis. However, the company’s Q3 fiscal 2020 revenues (fiscal ends in September) were 17% below the level seen a year ago, and the EPS figure for the quarter slid from $0.16 in Q3 fiscal 2019 to a loss of $0.24 per share in Q3 fiscal 2020.

Does Johnson Controls Have A Sufficient Cash Cushion To Meet Its Obligations Through The Coronavirus Crisis?

Johnson Controls’ total debt decreased from $12.1 billion in 2016 to $8.0 at the end of Q3 fiscal 2020, while its total cash increased from $0.6 billion to $2.3 billion over the same period. The company also generated $1.5 billion in cash from its operations in the first nine months of fiscal 2020, and it appears to be in a good position to weather the crisis.


Phases of Covid-19 crisis:

  • Early- to mid-March 2020: Fear of the coronavirus outbreak spreading rapidly translates into reality, with the number of cases accelerating globally
  • Late-March 2020 onward: Social distancing measures + lockdowns
  • April 2020: Fed stimulus suppresses near-term survival anxiety
  • May-June 2020: Recovery of demand, with gradual lifting of lockdowns – no panic anymore despite a steady increase in the number of cases
  • July-September 2020: Poor Q2 results for many companies, but continued improvement in demand and a decline in the number of new cases and progress with vaccine development buoy expectations

Going by the historical performance and after the recent rally, we believe that the JCI stock has little room for growth in the near future.

What if you’re looking for a more balanced portfolio instead? Here’s a high quality portfolio to beat the market, with over 100% return since 2016, versus 55% for the S&P 500. Comprised of companies with strong revenue growth, healthy profits, lots of cash, and low risk, it has outperformed the broader market year after year, consistently.

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