Is Johnson Controls Stock Fully Valued After 20% Gains This Year?

Johnson Controls stock (NYSE: JCI) is seeing higher levels after reports of Elliott Management – one of the largest activist funds in the world – building a position of over $1 billion in the company. ^[1] JCI stock has been rising, with over 20% gains this year. Looking at a slightly longer term, JCI stock has seen strong gains of 55% from levels of $45 in early January 2021 to around $70 now, outperforming the broader S&P 500 index, which has seen 40% gains over this roughly three-year period.

However, the increase in JCI stock has been far from consistent. Returns for the stock were 75% in 2021, -21% in 2022, and -10% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 — indicating that JCI underperformed the S&P in 2022 and 2023.

In fact, consistently beating the S&P 500 — in good times and bad — has been difficult over recent years for individual stocks; for heavyweights in the Industrials sector including GE, CAT, and UNP, and even for the megacap stars GOOG, TSLA, and MSFT. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.

Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could JCI face a similar situation as it did in 2022 and 2023 and underperform the S&P over the next 12 months — or will it see a strong jump? While the development of Elliott Management building a large position in the company is a near-term positive for the stock, we think after its recent gains, JCI stock is now fully valued.

We estimate Johnson Controls’ Valuation to be $70 per share, aligning with its current market price. Our estimate is based on a 19x expected earnings of $3.62 per share for fiscal 2024. The 19x figure is close to the stock’s average P/E over the last four years. Johnson Controls’ revenues haven’t seen any meaningful growth in recent quarters, amid continued weakness in China and lower demand for residential HVAC. That said, the company has benefited from a robust demand for commercial HVAC. Looking forward, the company expects its full-fiscal 2024 organic revenues to rise in the mid-single-digits and its earnings to be between $3.60 and $3.75 on a per-share and adjusted basis. With JCI stock already trading at around 20x forward earnings, we think the stock is appropriately priced, and investors willing to enter will likely be better off waiting for a dip.

While JCI stock looks like it is fully valued, 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.

[1] Returns as of 5/20/2024
[2] Cumulative total returns since the end of 2016

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1. Activist Hedge Fund Elliott Builds $1 Billion-Plus Stake in Johnson Controls, Crystal Tse, Bloomberg, May 20, 2024 [↩]