Johnson Controls has followed the market’s trajectory closely, rising in tandem with the S&P 500 over the past six months. The stock has climbed by 10.3% to $115.26 per share while the index has gained 14.4%.

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Why Is Johnson Controls Not Exciting?

We're cautious about Johnson Controls. Here are three reasons why JCI doesn't excite us and a stock we'd rather own.

1. Slow Organic Growth Suggests Waning Demand In Core Business

We can better understand Commercial Building Products companies by analyzing their organic 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% 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. Recent EPS Growth Below Our Standards

Although long-term earnings trends give us the big picture, we like to analyze EPS over a shorter period to see if we are missing a change in the business.

Johnson Controls’s weak 3.8% annual EPS growth over the last two years aligns with its revenue trend. This tells us it maintained its per-share profitability as it expanded.

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 7.2%, somewhat low compared to the best industrials companies that consistently pump out 20%+.

Final Judgment

Johnson Controls’s business quality ultimately falls short of our standards. That said, the stock currently trades at 25.7× forward P/E (or $115.26 per share). Beauty is in the eye of the beholder, but our analysis shows the upside isn’t great compared to the potential downside. We're pretty confident there are more exciting stocks to buy at the moment. We’d suggest looking at the most dominant software business in the world.

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