Johnson Controls (JCI)

Building operations company Johnson Controls (NYSE:JCI) announced better-than-expected revenue in Q1 CY2025, with sales up 1.4% year on year to $5.68 billion. On top of that, next quarter’s revenue guidance ($6.19 billion at the midpoint) was surprisingly good and 4.3% above what analysts were expecting. Its non-GAAP profit of $0.82 per share was 2.6% 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 performance is an indicator of its overall quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Unfortunately, Johnson Controls struggled to consistently increase demand as its $23.25 billion of sales for the trailing 12 months was close to its revenue five years ago. This was below our standards and suggests it’s a low quality business.

We at StockStory place the most emphasis on long-term growth, but within industrials, a half-decade historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. Johnson Controls’s recent performance shows its demand remained suppressed as its revenue has declined by 1.7% annually over the last two years.

Johnson Controls also reports 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 5.2% year-on-year growth. Because this number is better than its normal 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 1.4% but beat Wall Street’s estimates by 0.7%. Company management is currently guiding for a 5% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 2.5% over the next 12 months. Although this projection indicates its newer products and services will spur better top-line performance, it is still below the sector average.

All else equal, we prefer higher gross margins because they usually indicate that a company sells more differentiated products and commands stronger pricing power.

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 30% gross margin over the last five years. That means for every $100 in revenue, roughly $30.00 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, marking a 17.2 percentage point increase from 19.3% in the same quarter last year. Johnson Controls’s full-year margin has also been trending up over the past 12 months, increasing by 9.2 percentage points. If this move continues, it could suggest a less competitive environment where the company has better pricing power and 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 8.3%, higher than the broader industrials sector.

Analyzing the trend in its profitability, Johnson Controls’s operating margin rose by 5.3 percentage points over the last five years, showing its efficiency has meaningfully improved.

This quarter, Johnson Controls generated an operating profit margin of 11.3%, up 18.1 percentage points year on year. The increase was solid, and because its operating margin rose more than its gross margin, we can infer it was more efficient with expenses such as marketing, R&D, and administrative overhead.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Johnson Controls’s EPS grew at a decent 9.5% compounded annual growth rate over the last five years, higher than its flat revenue. This tells us management responded to softer demand by adapting its cost structure.

We can take a deeper look into Johnson Controls’s earnings to better understand the drivers of its performance. As we mentioned earlier, Johnson Controls’s operating margin expanded by 5.3 percentage points over the last five years. On top of that, its share count shrank by 12.7%. These are positive signs for shareholders because improving profitability and share buybacks turbocharge EPS growth relative to revenue growth.

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 6.7% was lower than its five-year trend. We hope its growth can accelerate in the future.

In Q1, Johnson Controls reported EPS at $0.82, up from $0.69 in the same quarter last year. This print beat analysts’ estimates by 2.6%. Over the next 12 months, Wall Street expects Johnson Controls’s full-year EPS of $3.52 to grow 9.4%.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

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 7.5% over the last five years, slightly better than the broader industrials sector.

Taking a step back, we can see that Johnson Controls’s margin was unchanged during that time, showing its long-term free cash flow profile is stable.

Johnson Controls’s free cash flow clocked in at $456 million in Q1, equivalent to a 8% margin. Its cash flow turned positive after being negative in the same quarter last year, but we wouldn’t read too much into the short term because investment needs can be seasonal, causing temporary swings. Long-term trends are more important.

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 6.6%, 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 has stayed the same over the last few years. If the company wants to become an investable business, it must improve its returns by generating more profitable growth.

Johnson Controls reported $795 million of cash and $9.99 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 $6.67 billion of EBITDA over the last 12 months, we view Johnson Controls’s 1.4× net-debt-to-EBITDA ratio as safe. We also see its $260 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.

We were impressed by how Johnson Controls beat analysts’ revenue, EPS, and EBITDA expectations this quarter. We were also glad its revenue guidance for next quarter exceeded Wall Street’s estimates. On the other hand, its EPS guidance for next quarter missed. Overall, we think this was still a solid quarter with some key areas of upside. The market seemed to be hoping for more, and the stock traded down 1.7% to $87.25 immediately following the results.

Updated: May 22, 2025 at 11:43 PM EDT

Before deciding whether to buy Johnson Controls or pass, we urge investors to consider business quality, valuation, and the latest quarterly results.

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 expanding operating margin shows the business has become more efficient, the downside is its projected EPS for the next year is lacking. On top of that, its relatively low ROIC suggests management has struggled to find compelling investment opportunities.

Johnson Controls’s P/E ratio based on the next 12 months is 25.4x. This valuation tells us it’s a bit of a market darling with a lot of good news priced in - you can find better investment opportunities elsewhere.

Wall Street analysts have a consensus one-year price target of $100.49 on the company (compared to the current share price of $97.93).

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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