The stock of Johnson Controls International PLC (NYSE:JCI, 30-year Financials) is believed to be significantly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $65.55 per share and the market cap of $47 billion, Johnson Controls International PLC stock appears to be significantly overvalued. GF Value for Johnson Controls International PLC is shown in the chart below.
Because Johnson Controls International PLC is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 7% over the past three years and is estimated to grow 1.87% annually over the next three to five years.
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Investing in companies with poor financial strength has a higher risk of permanent loss of capital. Thus, it is important to carefully review the financial strength of a company before deciding whether to buy its stock. Looking at the cash-to-debt ratio and interest coverage is a great starting point for understanding the financial strength of a company. Johnson Controls International PLC has a cash-to-debt ratio of 0.24, which is worse than 76% of the companies in Construction industry. GuruFocus ranks the overall financial strength of Johnson Controls International PLC at 5 out of 10, which indicates that the financial strength of Johnson Controls International PLC is fair. This is the debt and cash of Johnson Controls International PLC over the past years:
Companies that have been consistently profitable over the long term offer less risk for investors who may want to purchase shares. Higher profit margins usually dictate a better investment compared to a company with lower profit margins. Johnson Controls International PLC has been profitable 9 over the past 10 years. Over the past twelve months, the company had a revenue of $22.2 billion and earnings of $1.46 a share. Its operating margin is 9.64%, which ranks better than 73% of the companies in Construction industry. Overall, the profitability of Johnson Controls International PLC is ranked 6 out of 10, which indicates fair profitability. This is the revenue and net income of Johnson Controls International PLC over the past years:
Growth is probably one of the most important factors in the valuation of a company. GuruFocus' research has found that growth is closely correlated with the long-term performance of a company's stock. If a company's business is growing, the company usually creates value for its shareholders, especially if the growth is profitable. Likewise, if a company's revenue and earnings are declining, the value of the company will decrease. Johnson Controls International PLC's 3-year average revenue growth rate is better than 69% of the companies in Construction industry. Johnson Controls International PLC's 3-year average EBITDA growth rate is -0.7%, which ranks in the middle range of the companies in Construction industry.
Another way to look at the profitability of a company is to compare its return on invested capital and the weighted cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. We want to have the return on invested capital higher than the weighted cost of capital. For the past 12 months, Johnson Controls International PLC's return on invested capital is 4.63, and its cost of capital is 6.14. The historical ROIC vs WACC comparison of Johnson Controls International PLC is shown below:
In short, the stock of Johnson Controls International PLC (NYSE:JCI, 30-year Financials) appears to be significantly overvalued. The company's financial condition is fair and its profitability is fair. Its growth ranks in the middle range of the companies in Construction industry. To learn more about Johnson Controls International PLC stock, you can check out its 30-year Financials here.
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