Even though Johnson Controls (currently trading at $152.98 per share) has gained 7.6% over the last six months, it has lagged the S&P 500’s 13.1% return during that period. This may have investors wondering how to approach the situation.
Given the relatively weaker price action, is now a good time to buy JCI? Or are investors better off allocating their money elsewhere?
Why Does Johnson Controls Spark Debate?
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.
Two Things to Like:
1. Outstanding Long-Term EPS Growth
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
Johnson Controls’s EPS grew at 13.4% compounded annual growth rate over the last five years, higher than its 3.5% annualized revenue growth. This tells us the company became more profitable on a per-share basis as it expanded.
2. Increasing Free Cash Flow Margin Juices Financials
Free cash flow isn’t a prominently featured metric in company financials and earnings releases, but we think it’s telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
As you can see below, Johnson Controls’s margin expanded by 9.9 percentage points over the last five years. This is encouraging, and we can see it became a less capital-intensive business because its free cash flow profitability rose more than its operating profitability. Johnson Controls’s free cash flow margin for the trailing 12 months was 12.7%.
One Reason to Be Careful:
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 7.3% year-on-year growth. This performance slightly lagged the sector 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. 
Final Judgment
Johnson Controls has huge potential even though it has some open questions. With its shares lagging the market recently, the stock trades at 26.4× forward P/E (or $152.98 per share). Is now the time to initiate a position? See for yourself in our comprehensive research report, it’s free.
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