Johnson Controls Inc. (JCI) Annual Valuation

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It can be tempting to simply look at a company’s chart and say that since it is trading near its 52 week high, it must be overvalued.  But Intelligent Investors know that value is related to the fundamentals of the company, not what it is trading at, and Benjamin Graham taught that we must base our analysis on the fundamentals of the company in an attempt to gauge the risk level of the company and determine an estimate of the intrinsic value of the company.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a specific look at how Johnson Controls Inc. (JCI) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Johnson Controls, Inc. (Johnson Controls) manufactures, installs and services automatic temperature regulation systems for buildings. The Building Efficiency business is engaged in designing, producing, marketing and installing integrated heating, ventilating and air conditioning (HVAC) systems, building management systems, controls, security and mechanical equipment. The Power Solutions business is a global supplier of lead-acid automotive batteries for virtually every type of passenger car, light truck and utility vehicle. The Automotive Experience business is an automotive supplier, providing interior systems. In May 2013, Johnson Controls Inc acquired the remaining 50% interest in Tata Johnson Controls Automotive Ltd from its joint-venture partner Tata Autocomp Systems Ltd, a unit of Tata Sons Ltd. On September 27, 2013, the Company sold its HomeLink business to Gentex Corporation. Effective November 8, 2013, Johnson Controls Inc acquired a 90% interest in MAC SA.

JCI Chart

JCI data by YCharts

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 2/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
  3. Earnings Stability – positive earnings per share for at least 10 straight years – FAIL
  4. Dividend Record – has paid a dividend for at least 10 straight years – PASS
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – FAIL
  6. Moderate PEmg ratio – PEmg is less than 20 – FAIL
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 3/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – FAIL
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
  3. Earnings Stability – positive earnings per share for at least 5 years – PASS
  4. Dividend Record – currently pays a dividend – PASS
  5. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary

Key Data:

Recent Price $49.96
MG Value $73.88
MG Opinion Undervalued
Value Based on 3% Growth $33.65
Value Based on 0% Growth $19.73
Market Implied Growth Rate 6.51%
NCAV -$9.90
PEmg 21.53
Current Ratio 1.08
PB Ratio 2.88

Balance Sheet – 12/31/2013

Current Assets $12,726,000,000
Current Liabilities $11,803,000,000
Total Debt $4,866,000,000
Total Assets $30,832,000,000
Intangible Assets $7,787,000,000
Total Liabilities $19,301,000,000
Outstanding Shares 664,030,000

Earnings Per Share

2014 (estimate) $3.15
2013 $1.71
2012 $1.78
2011 $2.35
2010 $2.18
2009 -$0.57
2008 $1.63
2007 $2.16
2006 $1.75
2005 $1.30
2004 $1.41

Earnings Per Share – ModernGraham 

2014 (estimate) $2.32
2013 $1.77
2012 $1.69
2011 $1.61
2010 $1.31
2009 $1.00

Dividend History

JCI Dividend Chart

JCI Dividend data by YCharts

Conclusion:

Johnson Controls Inc. is not suitable for either the Defensive Investor or the Enterprising Investor.  The Defensive Investor is not interested because the company has a poor current ratio, has not had sufficient earnings stability or growth over the ten year period and is trading at high PEmg and PB ratios.  The Enterprising Investor is turned off by the high level of debt relative to the company’s current assets.  As a result, value investors seeking to follow the ModernGraham approach based on Benjamin Graham’s methods should research other opportunities, such as through a review of ModernGraham Stocks & Screens.  From solely a valuation perspective, the company does have some attractive qualities.  EPSmg (normalized earnings) have grown from $1.00 in 2009 to an estimated $2.32 for 2014, which is a strong level of growth that outpaces the market’s implied growth estimate of 6.51%.  The ModernGraham valuation model does return an estimate of intrinsic value that is above the market’s current price, so it appears the company may be undervalued.

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on Johnson Controls Inc. (JCI)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

If you like our valuations, why not check out ModernGraham Stocks & Screens?  It’s a great way to review the valuations while screening for things like low PE ratio, undervalued companies, etc.!

Disclaimer:  The author did not hold a position in Johnson Controls Inc. (JCI) or any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.

Logo taken from the Wikipedia; this article is not affiliated with the company in any manner.


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