After a 39% fall year-to-date, at the current levels, we believe Johnson Controls stock (NYSE: JCI) is undervalued. JCI stock fell from $79 in early January to $49 now. The YTD 39% fall for JCI marks an underperformance with -20% returns for the broader S&P500 index.
Looking at the longer term, JCI stock is up 56% from levels seen in late 2018. This marks an outperformance compared to some of its peers and the broader markets, with Illinois Tool Works stock rising 45%, Emerson Electric stock up 36%, and the S&P 500 index rising 54% over the same period.
This 56% rise for JCI stock since late 2018 was driven by: 1. Johnson Controls’ earnings, which rose 66.1% to $2.65 in 2021, compared to $1.59 in 2018, on a per share and adjusted basis, partly offset by 2. the company’s P/E ratio, which fell 6.1% to 18.4x currently, from 19.6x. The strong earnings growth above can be attributed to net margin expansion, higher revenues, and a decline in total shares, as discussed below.
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Johnson Controls’ revenue grew 1% to $23.7 billion in 2021, compared to $23.4 billion in 2018 (adjusted for divestitures), driven by higher demand for HVAC products. However, a decline in non-residential construction during the pandemic weighed on the company’s revenue growth. Of late, the company has seen a rebound in demand for its building products and solutions and HVAC products. Johnson Controls reported a 9% revenue growth to $6.1 billion for its latest quarter (Q2FY22), led by the Global Products segment, which saw a considerable 16% y-o-y growth. However, the company lowered its full-fiscal 2022 earnings outlook owing to the impact of supply chain disruptions. The revised outlook was the primary reason for a significant decline in JCI stock over the recent months.
Johnson Controls’ adjusted net margins expanded 27.1% to 8.1% in 2021, vs. 6.4% in 2018. However, rising costs in the current inflationary environment and the impact of supply chain disruption are expected to weigh on the net margins in the near term.
The company spent around $10 billion on share repurchases between 2018 and 2021, resulting in a 23% decline in total shares outstanding to 721 million in 2021, compared to 932 million in 2018. This clubbed with margin expansion, have been the key drivers for Johnson Controls’ earnings growth since 2018.
Looking forward, the supply chain disruption and semiconductor chip shortage will likely impact its sales and margin expansion over the next few quarters. A slowdown in global economic growth due to rising inflation may further impact the company’s businesses. JCI stock also faces headwinds from the current weakness in broader markets. The S&P500 has now entered the bear market territory with rising concerns of slowing economic growth given the high inflation, Fed action, and supply chain disruptions.
However, most of these factors appear to have already been priced in by the investors, given the sharp decline in JCI stock. We estimate Johnson Controls’ valuation to be $70 per share, reflecting a 40% upside from its current market price of $49, implying that investors are likely to be better off buying JCI stock in the recent dip for solid gains in the long-term. At its current levels, JCI stock is trading at just 16x forward adjusted earnings, compared to an average of 21x seen over the last three years, making the stock attractive from a valuation point of view.
While JCI stock looks undervalued, it is helpful to see how Johnson Controls’ Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.
Furthermore, the Covid-19 crisis has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how counter-intuitive the stock valuation is for Vicor vs. ACM Research.
|S&P 500 Return||-8%||-20%||71%|
|Trefis Multi-Strategy Portfolio||-7%||-25%||196%|
 Month-to-date and year-to-date as of 6/30/2022
 Cumulative total returns since the end of 2016