[Updated: 04/01/2021] JCI stock update
Last month we discussed why Johnson Controls Action (NYSE: JCI) seemed fully valued. Since then, many positive developments have taken place for the company. Earlier this month, the company announced a $ 4 billion share repurchase authorization increase, and it also increased its annual dividend to $ 1.08 per share from $ 1.04 per share. earlier. Earlier this week, ODS Global, a Dubai-based building management services provider, entered into a strategic partnership with Johnson Controls to improve building operations, primarily focused on energy efficiency and digital transformation. Johnson Controls is a major player in the building automation market, which is expected to reach a valuation of $ 273 billion by 2023. Finally, some analysts recently upgraded their ratings for JCI stock , citing several growth factors, including increased exposure to commercial buildings.
While these positive developments should bode well for JCI stock in the long term, we continue to believe that JCI stock is overvalued at current levels. The company reported revenues of $ 22.3 billion in 2020, reflecting a 12% drop from comparable revenues of $ 25.3 billion seen in 2018. Now, with the economic rebound following the containment of the Covid-19 crisis, Johnson Controls sales are expected to improve. However, according to consensus estimates, revenues are expected to be $ 23.3 billion in 2021 and $ 24.3 billion in 2022, implying that even by 2022, Johnson Controls will not reach the revenues it needs. ‘he used to generate in the pre-Covid period. That said, expanding margins and share buybacks will surely help the expansion of the company’s earnings, which is expected to hit $ 2.96 per share in 2022, up from $ 2.24 in 2020.
The stock has already appreciated 2.6 times since its March 2020 lows, significantly outperforming the broader indices, with the S&P gaining 76% over the same period. The new variants of the coronavirus have had an impact on the global economic rebound in several countries, and Johnson Controls will likely see the impact on its non-residential building business. We maintain our view that JCI stock is highly valued and is now vulnerable to downside risk. Our dashboard, ‘What factors led to 59% growth in JCI shares between 2017 and now‘, has the underlying numbers.
[Updated: 2/25/2021] Buy or sell JCI shares
After rising 2.4 times from its March 2020 low, at the current price of $ 56 per share, we believe Johnson Controls Stock , seems to be fully valued. JCI stock fell from $ 23 to $ 56 from the March 2020 low against the S&P which was up 75%. While JCI stock has outperformed the market due to better-than-expected quarterly results, fewer project installations and lower demand for heating, ventilation and air conditioning continue to be a concern in the near term. Additionally, the stock has risen 42% in the past year despite an 8% year-over-year decline over the past four quarters. While the gradual opening of the economy is expected to result in higher demand for HVAC and construction products, the stock appears to be richly valued from historical levels, making it vulnerable to downside risk. Our dashboard Buy or fear Johnson Controls stock provides the key figures of our thinking.
JCI shares are also up 89% from the $ 30 levels seen towards the end of 2018. Most of the growth in stock prices since 2018 can be attributed to the expansion of the P / E multiple of the society. In terms of fundamentals, total revenue fell 5%, from $ 23.4 billion in fiscal 2018 to $ 22.3 billion in 2020, mainly due to the impact of Covid -19 on aggregate demand for HVAC and construction products. In addition, a 640 basis point drop in net profit margin due to increased costs during the pandemic, mainly selling, administrative and other overheads, partially offset by a 19% drop in total of shares outstanding, due to share buybacks, meant the company’s EPS fell 36% to $ 0.84 in 2020, from $ 2.34 in 2018.
Although the company is showing a decline in revenue and profit, the P / E multiple has dropped from less than 4x in 2018 to 55x in 2020. The P / E multiple is currently at 66x, which we believe is high and compares to levels below 16x seen in 2017 and 2018. Now those numbers look optically high, given that they are based on GAAP earnings. But even if we were to look at the P / E multiple based on non-GAAP earnings, JCI stock is currently trading at 25x its EPS of $ 2.24. The 25x figure compares to around 20x levels seen in 2019 and 2020, making the stock vulnerable to downside risk.
The lockdowns induced by the coronavirus crisis have affected real estate activity, mainly residential, and hit demand for construction solutions. Project timelines and cash flow for real estate developers have been affected due to the shutdown of some construction activities in 2020. Now, with the gradual opening of the economy, Johnson Controls’ business is also experiencing an increase in demand. While the company reported a 4% drop in revenue in the first quarter of fiscal 2021, revenue was slightly above consensus estimates. In addition, the company’s net profit margin increased from just under 3% to over 6% over the same period, due to lower selling, administrative and other overheads and costs. restructuring.
Johnson Controls will likely see increased demand for its products in the near term as non-residential building construction rebounds. That said, any further recovery in the economy and its timing depends on the wider containment of the spread of the coronavirus. Our dashboard Trends in Covid-19 cases in the United States provides insight into the spread of the pandemic in the United States and contrasts with trends in Brazil and Russia. Currently, investors appear to be supported by Johnson Control’s positive earnings and earnings outlook based on the expected upturn in economic activity, and this appears to be valued in the current share price of $ 56.
While Johnson Controls stock may see a correction, 2020 has created many price discontinuities that may provide some interesting trading opportunities. For example, you’ll be surprised at how counter-intuitive stock valuation is. Honeywell vs. Roper Industries.
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