$50 to $70 In Less Than A Year: Is Johnson Controls Stock Headed To $80 Next?

Johnson Controls stock (NYSE: HUM) currently trades around $70 per share, compared to its peak levels of over $80 seen in January 2022. While the company’s stock has shed more than 10% of its value, Carrier stock (NYSE: CARR) has risen around 40% over the same period. JCI stock has lately been weighed down due to a weakness in the residential HVAC market, and a sharp decline in China sales. JCI stock was trading at much lower levels of around $50 in June 2022, just before the Fed started increasing rates, and is now 50% above that level. This aligns with the rise in the broader S&P 500 index over the same period, although JCI stock dropped below $50 yet again last October, and has recouped most of its losses in the last 10 months.

Notably, though, the increase in JCI stock over the last few years 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 CUK, HUBG, and GOGO, 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, elevated interest rates, and continued weakness in China’s HVAC market, 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? Returning to pre-inflation levels of over $80 implies a growth of about 15% from here, and we don’t think it will happen anytime soon. We estimate Johnson Controls’ Valuation to be $74 per share, close to its current market price. Our forecast is based on a 20x forward expected earnings of $3.67 per share in fiscal 2024 (fiscal ends in September). The 20x figure aligns with the stock’s average P/E ratio over the last four years.

Our detailed analysis of Johnson Controls’ upside post-inflation shock captures trends in the company’s stock during the turbulent market conditions seen since 2022. It compares these trends to the stock’s performance during the 2008 recession.

• 2020 – early 2021: Increase in money supply to cushion the impact of lockdowns led to high demand for goods; producers unable to match up.
• Early 2021: Shipping snarls and worker shortages from the coronavirus pandemic continue to hurt supply.
• April 2021: Inflation rates cross 4% and increase rapidly.
• Early 2022: Energy and food prices spike due to the Russian invasion of Ukraine. Fed begins its rate hike process.
• June 2022: Inflation levels peak at 9% – the highest level in 40 years. The S&P 500 index declined more than 20% from peak levels.
• July – September 2022: Fed hikes interest rates aggressively – resulting in an initial recovery in the S&P 500 followed by another sharp decline.
• October 2022 – July 2023: Fed continues rate hike process; improving market sentiments helps S&P500 recoup some of its losses.
• Since August 2023: Fed has kept interest rates unchanged to quell fears of a recession but points to potential rate cuts in 2024

In contrast, here’s how JCI stock and the broader market performed during the 2007/2008 crisis.

Timeline of 2007-08 Crisis

• 10/1/2007: Approximate pre-crisis peak in S&P 500 index
• 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
• 3/1/2009: Approximate bottoming out of S&P 500 index
• 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)

Johnson Controls and S&P 500 Performance During 2007-08 Crisis

JCI stock declined from $15 in September 2007 (pre-crisis peak) to $7 in March 2009 (as the markets bottomed out). It surged after the 2008 crisis to levels of around $17 in early 2010, rising over 2.5x between March 2009 and January 2010. The S&P 500 Index saw a decline of 51%, falling from levels of 1,540 in September 2007 (pre-crisis peak) to 757 in March 2009. It then rallied 48% between March 2009 and January 2010 to reach levels of 1,124.

Johnson Controls’ Fundamentals Over Recent Years

Johnson Controls’ revenue increased to $26.8 billion in fiscal 2023, compared to $22.3 billion in 2020, led by double-digit growth across segments. The North America Building Solutions and Global Products segments saw their sales rise over 20% in the last three years. However, lately, the Asia Pacific segment has been underperforming, with segment sales falling a significant 23% to $1.6 billion for the nine-month period ending June 2024. This can be attributed to a weak demand for systems in China.

Johnson Controls’ operating margin increased from 7.8% in 2020 to 9.1% now. This aided growth in the company’s earnings. Reported EPS over the last twelve-month period is $2.47 – much higher than $0.84 in 2020.

Does Johnson Controls Have A Sufficient Cash Cushion To Meet Its Obligations Through The Ongoing Inflation Shock?

Johnson Controls’ total debt increased from $7.8 billion in 2020 to $10.4 billion now, while its cash decreased from $2 billion to $0.9 billion over the same period. The company also garnered $2 billion in cash flows from operations in the last twelve months. Given its reasonable cash cushion, Johnson Controls appears to be in a comfortable position to service its near-term obligations.

Conclusion

With the Fed’s efforts to tame runaway inflation rates helping market sentiment and rate cuts are likely in the cards, we believe JCI stock has the potential for more gains once fears of a potential recession are allayed. That said, there are near-term concerns, primarily from the soft demand in China. At its current level of $72, JCI stock is already trading at 20x forward expected earnings, aligning with the stock’s average P/E ratio over the last four years. Given the headwinds from China market, we don’t see any reason to expand the valuation multiple. Overall, we think JCI stock is appropriately priced, with limited upside potential.

While JCI stock looks appropriately priced, 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 8/27/2024
[2] Cumulative total returns since the end of 2016

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