Johnson Controls (JCI)

Building operations company Johnson Controls (NYSE:JCI) reported Q3 CY2025 results beating Wall Street’s revenue expectations, with sales up 3.1% year on year to $6.44 billion. On the other hand, next quarter’s revenue guidance of $5.59 billion was less impressive, coming in 2.5% below analysts’ estimates. Its non-GAAP profit of $1.26 per share was 4.7% above analysts’ consensus estimates.

Company Overview

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.

Commercial building products companies, which often serve more complicated projects, can supplement their core business with higher-margin installation and consulting services revenues. More recently, advances to address labor availability and job site productivity have spurred innovation. Additionally, companies in the space that can produce more energy-efficient materials have opportunities to take share. However, these companies are at the whim of commercial construction volumes, which tend to be cyclical and can be impacted heavily by economic factors such as interest rates. Additionally, the costs of raw materials can be driven by a myriad of worldwide factors and greatly influence the profitability of commercial building products companies.

Competitors in the building efficiency and security solutions industry include Honeywell (NASDAQ:HON), Carrier Global (NYSE:CARR), and Trane Technologies (NYSE:TT).

A company’s long-term sales performance is one signal of its overall quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Unfortunately, Johnson Controls’s 1.1% annualized revenue growth over the last five years was weak. This was below our standards and is a tough starting point for our analysis.

Long-term growth is the most important, but within industrials, a half-decade historical view may miss new industry trends or demand cycles. Johnson Controls’s annualized revenue growth of 2.8% over the last two years is above its five-year trend, but we were still disappointed by the results.

We can dig further into the company’s sales dynamics by analyzing its organic revenue, which strips out one-time events like acquisitions and currency fluctuations that don’t accurately reflect its fundamentals. Over the last two years, Johnson Controls’s organic revenue averaged 4.9% year-on-year growth. Because this number is better than its two-year revenue growth, we can see that some mixture of divestitures and foreign exchange rates dampened its headline results.

This quarter, Johnson Controls reported modest year-on-year revenue growth of 3.1% but beat Wall Street’s estimates by 1.6%. Company management is currently guiding for a 3% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 5.3% over the next 12 months. Although this projection implies its newer products and services will catalyze better top-line performance, it is still below average for the sector.

Johnson Controls’s unit economics are better than the typical industrials business, signaling its products are somewhat differentiated through quality or brand. As you can see below, it averaged a decent 31.9% gross margin over the last five years. That means for every $100 in revenue, roughly $31.89 was left to spend on selling, marketing, R&D, and general administrative overhead.

Johnson Controls’s gross profit margin came in at 36.5% this quarter, in line with the same quarter last year. Zooming out, Johnson Controls’s full-year margin has been trending up over the past 12 months, increasing by 1.2 percentage points. If this move continues, it could suggest better unit economics due to more leverage from its growing sales on the fixed portion of its cost of goods sold (such as manufacturing expenses).

Johnson Controls has done a decent job managing its cost base over the last five years. The company has produced an average operating margin of 8.7%, higher than the broader industrials sector.

Analyzing the trend in its profitability, Johnson Controls’s operating margin decreased by 2.6 percentage points over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability.

In Q3, Johnson Controls generated an operating margin profit margin of 5.5%, down 6.4 percentage points year on year. Since Johnson Controls’s operating margin decreased more than its gross margin, we can assume it was less efficient because expenses such as marketing, R&D, and administrative overhead increased.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

Johnson Controls’s EPS grew at a solid 10.9% compounded annual growth rate over the last five years, higher than its 1.1% annualized revenue growth. However, this alone doesn’t tell us much about its business quality because its operating margin didn’t improve.

We can take a deeper look into Johnson Controls’s earnings quality to better understand the drivers of its performance. A five-year view shows that Johnson Controls has repurchased its stock, shrinking its share count by 14.2%. This tells us its EPS outperformed its revenue not because of increased operational efficiency but financial engineering, as buybacks boost per share earnings.

Like with revenue, we analyze EPS over a shorter period to see if we are missing a change in the business.

For Johnson Controls, its two-year annual EPS growth of 3.8% was lower than its five-year trend. We hope its growth can accelerate in the future.

In Q3, Johnson Controls reported adjusted EPS of $1.26, down from $1.28 in the same quarter last year. Despite falling year on year, this print beat analysts’ estimates by 4.7%. Over the next 12 months, Wall Street expects Johnson Controls’s full-year EPS of $3.77 to grow 18.3%.

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.

Johnson Controls has shown decent cash profitability, giving it some flexibility to reinvest or return capital to investors. The company’s free cash flow margin averaged 7.3% over the last five years, slightly better than the broader industrials sector.

Johnson Controls’s free cash flow clocked in at $838 million in Q3, equivalent to a 13% margin. The company’s cash profitability regressed as it was 5.5 percentage points lower than in the same quarter last year, but it’s still above its five-year average. We wouldn’t read too much into this quarter’s decline because investment needs can be seasonal, causing short-term swings. Long-term trends trump temporary fluctuations.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Johnson Controls historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 7.2%, somewhat low compared to the best industrials companies that consistently pump out 20%+.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, Johnson Controls’s ROIC averaged 1.4 percentage point decreases over the last few years. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.

Johnson Controls reported $379 million of cash and $9.88 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $3.39 billion of EBITDA over the last 12 months, we view Johnson Controls’s 2.8× net-debt-to-EBITDA ratio as safe. We also see its $94 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

It was great to see Johnson Controls’s full-year EPS guidance top analysts’ expectations. We were also glad its organic revenue outperformed Wall Street’s estimates. On the other hand, its revenue guidance for next quarter fell short of Wall Street’s estimates. Overall, this print was mixed but still had some key positives. The stock traded up 3.6% to $115.07 immediately following the results.

Updated: December 3, 2025 at 10:59 PM EST

The latest quarterly earnings matters, sure, but we actually think longer-term fundamentals and valuation matter more. Investors should consider all these pieces before deciding whether or not to invest in Johnson Controls.

We cheer for all companies making their customers lives easier, but in the case of Johnson Controls, we’ll be cheering from the sidelines. To kick things off, its revenue growth was weak over the last five years. And while its projected EPS for the next year implies the company’s fundamentals will improve, the downside is its relatively low ROIC suggests management has struggled to find compelling investment opportunities. On top of that, its organic revenue growth has disappointed.

Johnson Controls’s P/E ratio based on the next 12 months is 25.2x. This valuation tells us a lot of optimism is priced in - we think there are better stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $131.78 on the company (compared to the current share price of $114.22).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.