WWe believe there are other stocks in the industrial sector that are currently better valued than Johnson Controls (NYSE: JCI). Johnson Control’s current price-to-operating profit (P / EBIT) ratio of 44x is well above levels below 17x for Deere (DE) and 15x for Northrop Grumman (CNO). Both of these stocks have a lower valuation (P / EBIT) than Johnson Controls, while both saw higher revenue growth and operating income. This disconnect between valuation and performance could mean that you are better off buying DE and NOC against JCI. Specifically, we come to our conclusion by examining the historical trends in revenue, operating income and P / EBIT of these companies. Our dashboard Better bet that Johnson Controls Stock: Pay less to get more from peers in DE, NOC has more details – parts of which are summarized below.
1. Income growth
Johnson Controls revenue decreases at an average rate of 0.7% over the past three years, compared to average revenue growth of 7.1% for Deere and 12% for Northrop Grumman. Even though we look at revenue growth over the past twelve months, Johnson Controls’ 8.3% drop in revenue is far less than a 4.8% drop for Deere and revenue growth of 8.7% for Northrop Grumman.
- The decline in Johnson Controls revenue over the recent past can be attributed to the impact of Covid-19 on the overall construction activity, primarily on the non-residential side, leading to lower demand for solutions and products. of building the business. However, that trend is now set to reverse, given that 45% of the US population is fully vaccinated, and it looks like the economy will open sooner. This will bode well for Johnson Controls with an increase in the number of project installations and increased demand for heating, ventilation and air conditioning (HVAC), primarily on the commercial side.
- As far as Deere is concerned, the coronavirus crisis has caused lockdowns, increased unemployment and lower demand for oil and gas, has had a negative impact on all construction activity, weighing on the Deere’s revenue growth in fiscal 2020, primarily for its construction equipment segment, which was down 20%. year-on-year decline in 2020. However, unlike Johnson Controls, Deere has already seen a sharp rebound in demand, as evidenced by its latest quarterly results. Deere’s revenue in the fiscal second quarter jumped 34% year-on-year to $ 11.0 billion, on strong demand for construction and farm equipment. In fact, Deere has a brighter outlook for years to come, as the age of farm equipment in the United States is now above average, and farmers will be looking to upgrade them in the years to come. .
- For Northrop Grumman, its Aerospace and Space segments have experienced strong growth in recent years, driven by higher demand for its manned and autonomous aircraft systems and strategic missile systems. Notably, the company’s backlog has nearly doubled in recent years, from $ 42 billion in 2017 to $ 80 billion in 2020, helped by a growing defense budget (note that the U.S. government is contributing about 85% of the company’s turnover) and a high demand for space. systems, a trend that is expected to continue in the short term.
2. Growth in operating income
Johnson Controls’ three-year average operating profit fell an average of 4.0%, much worse than the average growth of 9.3% for Deere and 2.4% for Northrop Grumman. Better revenue growth for the latter two as well as increased margins for Deere led to higher operating profit growth for these companies.
Over the past twelve months, Johnson Controls’ operating income growth of 1.1% is well below Deere’s 11% and over 42% at Northrop Grumman. This can be attributed to improved margins at Deere and Northrop Grumman. While Deere’s operating margins have increased in recent years thanks to better pricing realization, Northrop Grumman’s margins have been bolstered by lower overheads on the company’s fixed-price contracts. Johnson Controls has also seen its operating margins increase in recent quarters, thanks to lower selling and administrative expenses.
The net of everything
It is clear that Deere and Northrop Grumman have experienced higher growth in revenue and operating profit compared to Johnson Controls over the past twelve months as well as over the past three years. Still, they seem to be priced significantly less than Johnson Controls. Why is that? A certain variance in the valuation is understandable given Johnson Controls’ long term goal of providing energy efficient building solutions and a lower carbon footprint. However, the current valuation gap appears to be very large.
Moreover, it is not that these figures are biased due to the pandemic. Even though we were looking at revenue growth and operating revenue a year ago, Deere and Northrop Grumman were doing better and even then they were valued much lower than Johnson Controls (as shown in the image below. below).
While it is undeniable that Johnson Controls will experience a rebound in sales, as the Covid-19 crisis ends, this factor also applies to other companies, especially Deere, which has already seen a strong rebound in demand. . Additionally, given that there has been a persistent underperformance in revenue growth and operating income for JCI relative to DE and NOC, this reinforces our conclusion that JCI stock is expensive relative to to his peers. Overall, we believe that this valuation gap will eventually narrow over time to favor the comparatively cheaper name group. As such, we believe DE and NOC shares are currently better buying opportunities compared to JCI shares.
While DE and NOC stocks may outperform JCI in the short term, 2020 has created many price discontinuities that may provide attractive trading opportunities. For example, you’ll be surprised how counterintuitive stock valuation is to Cirrus Logic vs. Northrop Grumman.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.