Based on the factors that Benjamin Graham considered in analyzing potential stock picks, Johnson Controls International is not a quality investment. Only investors with a high risk tolerance and a solid investment thesis on the stock will be interested in this large-cap Farm & Heavy Construction Machinery company.
Johnson Controls International Is Probably Overvalued
Graham devised the below equation to give investors a quick way of determining whether a stock is trading at a fair multiple of its earnings and its assets:
√(22.5 * 4 year average earnings per share (2.9) * 4 year average book value per share (23.995) = $39.57
At today's price of $60.67 per share, Johnson Controls International is now trading 53.3% above the maximum price that Graham would have wanted to pay for the stock.
Even though the stock does not trade at an attractive multiple, it might still meet some of the other criteria for quality stocks that Graham listed in Chapter 14 of The Intelligent Investor.
An Acceptable Record Of Dividends and Eps Growth In Excess Of Graham'S Requirements
Another one of Graham's requirements is for a 30% or more cumulative growth rate of the company's earnings per share over the last ten years.To determine Johnson Controls International's EPS growth over time, we will average out its EPS for 2007, 2008, and 2009, which were $0.08, $0.58, and $0.63 respectively. This gives us an average of $0.43 for the period of 2007 to 2009. Next, we compare this value with the average EPS reported in 2020, 2021, and 2022, which were $0.84, $2.27, and $2.19, for an average of $1.77. Now we see that Johnson Controls International's EPS growth was 311.63% during this period, which satisfies Ben Graham's requirement.
Shareholders of Johnson Controls International have received regular dividends since 2014. The company has returned an average dividend yield of 2.4% over the last five years.
Negative Current Asset to Liabilities Balance and Not Enough Current Assets to Cover Current Liabilities
Graham sought companies with extremely low debt levels compared to their assets. For one, he expected their current ratio to be over 2 and their long term debt to net current asset ratio to be near, or ideally under, under 1. Johnson Controls International fails on both counts with a current ratio of 1.0 and a debt to net current asset ratio of -0.6.
According to Graham's analysis, Johnson Controls International is likely a company of low quality, which is trading far above its fair price.
| 2019-11-21 | 2020-11-16 | 2021-11-15 | 2022-11-15 | |
|---|---|---|---|---|
| Revenue (MM) | $23,968 | $22,317 | $23,668 | $25,299 |
| Gross Margins | 32.1% | 33.2% | 34.0% | 33.0% |
| Operating Margins | 6.0% | 7.8% | 11.8% | 9.5% |
| Net Margins | 23.67% | 2.83% | 6.92% | 6.06% |
| Net Income (MM) | $5,674 | $631 | $1,637 | $1,532 |
| Net Interest Expense (MM) | -$350 | -$231 | -$206 | -$213 |
| Depreciation & Amort. (MM) | -$825 | -$822 | -$845 | -$830 |
| Earnings Per Share | $6.49 | $0.84 | $2.27 | $1.99 |
| EPS Growth | n/a | -87.06% | 170.24% | -12.33% |
| Diluted Shares (MM) | 874 | 754 | 721 | 686 |
| Free Cash Flow (MM) | $2,302 | $2,795 | $2,979 | $2,455 |
| Capital Expenditures (MM) | -$559 | -$316 | -$428 | -$465 |
| Net Current Assets (MM) | -$9,065 | -$12,229 | -$13,139 | -$13,071 |
| Current Ratio | 1.37 | 1.22 | 1.1 | 1.04 |
| Long Term Debt (MM) | $6,708 | $7,526 | $7,506 | $7,426 |
| Net Debt / EBITDA | 0.62 | 3.72 | 3.52 | 2.68 |
