Johnson Controls has been treading water for the past six months, recording a small return of 2.4% while holding steady at $78.41. However, the stock is beating the S&P 500’s 6.9% decline during that period.
Is now the time to buy Johnson Controls, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Even with the strong relative performance, we're cautious about Johnson Controls. Here are three reasons why there are better opportunities than JCI and a stock we'd rather own.
Why Do We Think Johnson Controls Will Underperform?
Founded after patenting the electric room thermostat, Johnson Controls (NYSE: JCI) specializes in building products and technology solutions, including HVAC systems, fire and security systems, and energy storage.
1. Slow Organic Growth Suggests Waning Demand In Core Business
Investors interested in Commercial Building Products companies should track organic revenue in addition to reported revenue. This metric gives visibility into Johnson Controls’s core business because it excludes one-time events such as mergers, acquisitions, and divestitures along with foreign currency fluctuations - non-fundamental factors that can manipulate the income statement.
Over the last two years, Johnson Controls’s organic revenue averaged 5.8% year-on-year growth. This performance was underwhelming and suggests it may need to improve its products, pricing, or go-to-market strategy, which can add an extra layer of complexity to its operations. 
2. Projected Revenue Growth Is Slim
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Johnson Controls’s revenue to rise by 1.9%. Although this projection indicates its newer products and services will spur better top-line performance, it is still below average for the sector.
3. Previous Growth Initiatives Haven’t Impressed
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
Johnson Controls historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 6.4%, somewhat low compared to the best industrials companies that consistently pump out 20%+.
Final Judgment
We see the value of companies helping their customers, but in the case of Johnson Controls, we’re out. Following its recent outperformance amid a softer market environment, the stock trades at 21.9× forward price-to-earnings (or $78.41 per share). This multiple tells us a lot of good news is priced in - we think there are better investment opportunities out there. Let us point you toward a dominant Aerospace business that has perfected its M&A strategy.
Stocks We Like More Than Johnson Controls
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