The building products company is a good value for investors willing to give management the benefit of the doubt.
Johnson Controls is a value option for pragmatic investors
Lee Samaha (Johnson Controls): Despite a disappointing set of fourth-quarter results and guidance, Johnson Controls still looks like an excellent value option. It’s not that the company isn’t growing or that it operates in unattractive markets. Instead, the company’s problem is that its growth isn’t quite what management expected it to be in its fiscal 2023.
Still, management’s guidance calls for mid-single-digit revenue growth in 2024, and the midpoint of its earnings per share guidance of $3.65-$3.80 puts it on about 15 times 2024 earnings and around 18 times free cash flow.
Its valuation metrics look good, and recall that it only expects to convert FCF from net income at an 85% rate in 2024 to reach 100% conversion over time. In other words, there’s upside potential to its FCF generation that doesn’t just depend in earnings growth.
Growth came in lower than expected due to the negative impact of a cyber attack and slower than expected sales in its global products (heating, ventilation, air conditioning, refrigeration, building controls, and fire & safety equipment) segment. These products are sold through dealers currently running down inventory built after a period when product was more problematic to secure quickly. That’s something slowing Johnson Controls’ sales growth.
Management believes it will work through the impact of the cyber attack and the inventory restocking in 2023 and the 9% growth in orders and backlog in the fourth quarter in its building solutions (design, servicing, and installation of equipment) business is a sign of a buoyant underlying market.
As such, it makes sense to give management the benefit of the doubt, making Johnson Controls an attractive stock to buy.
