Since April 2021, the S&P 500 has delivered a total return of 65%. But one standout stock has doubled the market - over the past five years, Johnson Controls has surged 129% to $142 per share. Its momentum hasn’t stopped as it’s also gained 28.1% in the last six months thanks to its solid quarterly results, beating the S&P by 25%.

Is now the time to buy Johnson Controls, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.

Why Is Johnson Controls Not Exciting?

We’re glad investors have benefited from the price increase, but we don't have much confidence in Johnson Controls. Here are three reasons you should be careful with JCI and a stock we'd rather own.

1. Slow Organic Growth Suggests Waning Demand In Core Business

Investors interested in Commercial Building Products companies should track organic revenue in addition to reported revenue. This metric gives visibility into Johnson Controls’s core business because it excludes one-time events such as mergers, acquisitions, and divestitures along with foreign currency fluctuations - non-fundamental factors that can manipulate the income statement.

Over the last two years, Johnson Controls’s organic revenue averaged 5.8% year-on-year growth. This performance was underwhelming and suggests it may need to improve its products, pricing, or go-to-market strategy, which can add an extra layer of complexity to its operations.

2. Projected Revenue Growth Is Slim

Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.

Over the next 12 months, sell-side analysts expect Johnson Controls’s revenue to rise by 6.4%. While this projection implies its newer products and services will catalyze better top-line performance, it is still below average for the sector.

3. Previous Growth Initiatives Haven’t Impressed

Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? Enter ROIC, a metric showing how much operating profit a company generates relative 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 7.4%, somewhat low compared to the best industrials companies that consistently pump out 20%+.

Final Judgment

Johnson Controls isn’t a terrible business, but it doesn’t pass our quality test. With its shares beating the market recently, the stock trades at 28.9× forward P/E (or $142 per share). Beauty is in the eye of the beholder, but our analysis shows the upside isn’t great compared to the potential downside. We're pretty confident there are more exciting stocks to buy at the moment. We’d suggest looking at a top digital advertising platform riding the creator economy.

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