Johnson Controls International: Nothing but upside for investors

Key Points

• Johnson Controls International's sell-off is overdone and has the market set up for a sharp reversal. 
• The deep value and relatively high yield will help sustain the rebound when it forms.
• Analysts sentiment suggests at least a 10% rebound that could extend to 30% or more. 

Johnson Controls International NYSE: JCI stock is down 30% from its recent highs, offering an attractive entry for investors. 

While the company faces headwinds, the business and outlook are stable at a minimum and can sustain capital returns. The odds are high for a rebound because the stock trades near long-term lows at the bottom of an established trading range. 

Because the analysts' sentiment has been stable over the last year and assumes a minimum of 10% upside for the stock, the rebound could be rapid and substantial. 

Growing Johnson Controls has a strong 2023; growth to continue

The residential building industry faces some of the most challenging headwinds but has had little impact on Johnson Controls. While new homes and buildings are slow to materialize, homeowners who don't move are faced with servicing, upgrading and replacing old equipment. It has helped JCI sustain a mid-to-high single-digit growth pace all year, growing backlogs to record levels, which should continue in Q4 and next year.

The consensus estimates for Q4 include a 5% growth in revenue compounded by a wider margin. The bottom line should grow at double the pace, and those metrics should persist in 2024. The consensus for next year includes near-5% growth, with EPS rising 11%. The takeaway is that business is healthy and will be in better shape next year. 

The stock trades at a low 14x earnings, 13x next year’s consensus, a bargain relative to the SPDR S&P 500 ETF Trust NYSEARCA: SPY. Competitors Carrier Global Corporation NYSE: CARR and Trane Technologies NYSE: TT trade 20x to 25x their earnings and pay about half the yield, suggesting a deep value within the industry. Regarding the dividend, Johnson Controls International pays about 2.6% with shares at long-term lows, and it comes with a positive outlook for distribution increases.

The payout ratio in 2023 is about 42% and falls compared to the next year’s outlook, so there is room in the cash flow. The company increased for the last two consecutive years and has only increased the payout since 2011, so there is a precedent to set the expectation. The balance sheet is a fortress with long-term debt of 0.5x shareholder equity.

Cash flow is solid and allows for share repurchases. The company repurchased $366 million of shares in Q3 and $613 million on a to-date basis. The share count is down about 2% due to the activity, and repurchases should continue in Q4 and 2024.

Johnson Controls International's share decline is overextended 

The decline in JCI share price is due primarily to the analysts. Activity has been mixed in 2023, including notable downward revisions in price targets and a few downgrades. However, the takeaway is that the market has front-run the analysts and should rebound. Despite the mixed activity, the analysts' community continues to rate the stock a "moderate buy" with a price target trending within a narrow range all year. The analysts' low price target of $58 implies at least a 10% upside, and the consensus is closer to 30%, and neither will likely show much change.

The price action in JCI shares is favorable to bottoming and a reversal. The market fell to the bottom of a long-term trading range and is forming a head and shoulders on the daily charts. 

Assuming the market follows through on this signal, the stock price should test and move above the $54 level soon. If the market can't break above $54, it may become range-bound at current levels to provide entry at a lower price. In that scenario, the floor for this market is near $48. A fall through that level would indicate a significant change in the outlook.