Over the past six months, Johnson Controls has been a great trade, beating the S&P 500 by 11.8%. Its stock price has climbed to $106.50, representing a healthy 39.7% increase. This was partly thanks to its solid quarterly results, and the performance may have investors wondering how to approach the situation.

Is now the time to buy Johnson Controls, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free for active Edge members.

Why Is Johnson Controls Not Exciting?

We’re glad investors have benefited from the price increase, but we're cautious about Johnson Controls. Here are three reasons why JCI doesn't excite us 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 4.8% 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. Recent EPS Growth Below Our Standards

Although long-term earnings trends give us the big picture, we like to analyze EPS over a shorter period to see if we are missing a change in the business.

Johnson Controls’s EPS grew at an unimpressive 5% compounded annual growth rate over the last two years. On the bright side, this performance was higher than its flat revenue and tells us management responded to softer demand by adapting its cost structure.

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? 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 7.3%, somewhat low compared to the best industrials companies that consistently pump out 20%+.

Final Judgment

Johnson Controls’s business quality ultimately falls short of our standards. With its shares beating the market recently, the stock trades at 25.3× forward P/E (or $106.50 per share). Investors with a higher risk tolerance might like the company, but we don’t really see a big opportunity at the moment. We're fairly confident there are better stocks to buy right now. We’d suggest looking at one of our top software and edge computing picks.

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