Johnson Controls International (JCI) stock climbed 0.9 % this morning. According to our metrics, the company seems overvalued at today's prices. In the below analysis, we will put Johnson Controls International's valuation in the context of its poor growth indicators and mixed market sentiment, which are also strong drivers for share price.
Johnson Controls International plc, together with its subsidiaries, engages in engineering, manufacturing, commissioning, and retrofitting building products and systems in the United States, Europe, the Asia Pacific, and internationally. The large-cap Consumer Discretionary company is based in Cork, Ireland and has 102,000 full time employees.
JCI Has a Higher P/E Ratio Than the Sector Average
Compared to the Consumer Discretionary sector's average of 22.33, Johnson Controls International has a trailing twelve month price to earnings (P/E) ratio of 32.3 and an expected P/E ratio of 14.6. The P/E ratios are calculated by dividing the company's share price by its trailing 12 month of $1.82 or forward earnings per share of $4.02.
Earnings represent the net profits left over after subtracting costs of goods sold, taxes, and operating costs from the company's recorded sales revenue. One way of looking at the P/E ratio is that it represents how much investors are willing to pay for every dollar's worth of the company's earnings. Since Johnson Controls International's P/E ratio is higher than its sector average of 22.33, we can deduce that the market is overvaluing the company's earnings.
Johnson Controls International Is Fairly Valued in Terms of Expected Growth
Another factor pointing to Johnson Controls International's value is its PEG ratio of 1.1. This is the stock's price to earnings ratio divided by its estimated earnings growth rate. If the resulting ratio is near or lower than 1 -- but higher than 0 -- its indicates that the company is faitly valued in terms of expected growth.
JCI Has an Average P/B Ratio
Traditionally, stock pickers used to focus primarily on finding issues that were trading significantly below their tangible asset value, to guarantee themselves a margin of safety. But such an approach would screen out many valuable securities because many profitable businesses -- especially those that heavily leverage information technology -- simply do not have many tangible assets compared to more capital intensive companies.
Therefore, modern value investors tend to focus less on absolute price to book value (P/B) ratios. Instead of singling out stocks with a P/B ratio of less than 1, they will compare the target company against its peer group. For Johnson Controls International, the P/B value is 2.5 while the average for the Consumer Discretionary sector is 3.12.
JCI Is Generating Cash
Johnson Controls International has decent free cash flows. This represents the actual cash that the company is generating from its sales revenues, minus its re-investments in the business (capital expenditures). The company's operating cash flows have an average growth rate of 13.4%, compared to 0.3% for capital expenditures. From the table below we can also see that the free cash flows has an average growth rate of 22.7% and a coefficient of variability of 48.4%:
| Date Reported | Cash Flow from Operations ($ k) | Capital expenditures ($ k) | FreeCashFlow ($ k) | YoY Growth (%) |
|---|---|---|---|---|
| 2022-09-30 | 1,986,000 | -592,000 | 1,394,000 | -27.96 |
| 2021-09-30 | 2,487,000 | -552,000 | 1,935,000 | 120.14 |
| 2020-09-30 | 975,000 | -96,000 | 879,000 | 42.69 |
| 2019-09-30 | 1,202,000 | -586,000 | 616,000 | n/a |
Johnson Controls International's Is a Profitable Business
If you are looking to make JCI a long term investment, it's essential that you understand the viability of its business through a study of its margins. Gross margins tell you how much the company makes in profit when only the costs directly related to producing the goods or delivering the service are taken into account. Operating margins, on the other hand, factor in overhead costs so they tell you how effectively Johnson Controls International is run.
Johnson Controls International's Gross Margins
| Date Reported | Revenue ($ k) | Cost of Revenue ($ k) | Gross Margins (%) | YoY Growth (%) |
|---|---|---|---|---|
| 2022-09-30 | 25,299,000 | 16,956,000 | 32.98 | -3.14 |
| 2021-09-30 | 23,668,000 | 15,609,000 | 34.05 | 2.53 |
| 2020-09-30 | 22,317,000 | 14,906,000 | 33.21 | 3.46 |
| 2019-09-30 | 23,968,000 | 16,275,000 | 32.1 | n/a |
Johnson Controls International's Operating Margins
| Date Reported | TotalRevenue ($ k) | Operating Expenses ($ k) | Operating Margins (%) | YoY Growth (%) |
|---|---|---|---|---|
| 2022-09-30 | 25,299,000 | 5,945,000 | 9.48 | -19.86 |
| 2021-09-30 | 23,668,000 | 5,258,000 | 11.83 | 51.28 |
| 2020-09-30 | 22,317,000 | 5,665,000 | 7.82 | 29.26 |
| 2019-09-30 | 23,968,000 | 6,244,000 | 6.05 | n/a |
Johnson Controls International's cost of revenue is growing at a rate of 1.0% in contrast to -1.2% for operating expenses. Sales revenues, on the other hand, have experienced a 1.4% growth rate. As a result, the average gross margins growth is 0.7 and the average operating margins growth rate is 11.9, with coefficients of variability of 2.4% and 28.0% respectively.
Johnson Controls International Benefits From Positive Market Signals
The market sentiment regarding Johnson Controls International is overwhelmingly positive. The stock has an average rating of buy and target prices ranging from $80.0 to $58.0. JCI is trading -17.08% away from its target price of $70.84. 1.0% of the company's shares are tied to short positions, and 93.2% of the shares are held by institutional investors.
| Date Reported | Holder | Percentage | Shares | Value |
|---|---|---|---|---|
| 2022-12-31 | Dodge & Cox Inc | 10% | 62,614,115 | $3,677,953,220 |
| 2022-12-31 | Vanguard Group, Inc. (The) | 10% | 59,465,991 | $3,493,032,411 |
| 2022-12-31 | Blackrock Inc. | 9% | 56,560,190 | $3,322,345,655 |
| 2022-12-31 | Wellington Management Group, LLP | 9% | 55,028,882 | $3,232,396,621 |
| 2022-12-31 | Massachusetts Financial Services Co. | 7% | 41,410,199 | $2,432,435,158 |
| 2022-12-31 | State Street Corporation | 5% | 28,254,183 | $1,659,650,756 |
| 2022-12-31 | Franklin Resources, Inc. | 3% | 15,966,131 | $937,850,561 |
| 2022-12-31 | Invesco Ltd. | 2% | 12,433,802 | $730,361,550 |
| 2022-12-31 | Pictet Asset Management SA | 2% | 12,139,528 | $713,075,895 |
| 2022-12-31 | Geode Capital Management, LLC | 2% | 12,026,982 | $706,464,942 |
