These 4 Numbers Suggest Something Is Wrong

Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Investors need to make sure they read each earnings report from the companies they invest in. I’m worried that investors are overlooking a few issues at Johnson Controls (NYSE: JCI). Don’t get me wrong, Johnson Controls is a company I’ve followed for a long time, in fact, the company is the first stock I ever owned. The company’s easy to access dividend reinvestment plan that you can start with just $50 was a primary reason I bought the shares first. I liked that the company was diversified into heating and cooling, auto systems, and batteries. The company’s strong history of dividend and earnings growth didn’t hurt either. However, today’s Johnson Controls has some problems that I don’t remember seeing years ago when I bought the shares.

Lots Of Press, But Not Something To Charge Your Batteries
I’ve read multiple articles about Johnson Controls potential when it comes to power systems. Analysts and investors claim that the company will supply power systems not only to the auto industry, but to other businesses as well.

The companies that Johnson Controls competes against are some of the strongest and most well known in the world. In the power and building efficiency businesses, companies like General Electric (NYSE: GE) and United Technologies (NYSE: UTX) are Johnson Controls’ direct competition. In the auto industry, Magna International (NYSE: MGA) and others are in constant competition for auto manufacturers dollars.

While Johnson Controls power systems business could be a future growth driver, if investors are hoping this business will carry the company forward, they may be disappointed. The truth is, the company’s Building Efficiency and Automotive Experience businesses are far more important to Johnson Controls future. To be blunt, these two businesses generated $8.9 billion in revenue compared to just $1.6 billion from power systems.

No Power In These Results
While Johnson Controls power systems might provide a boost to the company longer-term, their current results and expected growth are just not that good. It’s one thing to expect great things from a company, but when all of their peers are doing better, you have to question the investment thesis behind Johnson Controls.

One obvious issue with Johnson Controls as an investment is the company’s yield isn’t exactly something to write home about. At the present time, General Electric's yield is over 3%, and United Technologies pays a yield of about 2.25%. By comparison, Johnson Controls' yield of about 2% is only slightly better than Magna International’s yield of about 1.8%.

The second challenge facing Johnson Controls is the company’s earnings growth is sub-par as well. United Technologies offers a better-expected earnings growth rate at 13.53%, and Magna International’s 12.75% growth rate tops Johnson Controls as well. Over the next few years, Johnson Controls expected EPS growth of 11.73% is only slightly higher than the 10.87% growth rate from General Electric. With other companies offering faster growth rates, Johnson Controls isn’t exactly a screaming buy for growth investors.

The third problem with Johnson Controls is, the company’s pricing and expense management is the worst of their peers. If you compare Johnson Controls operating margin to their peers, the company’s 3.79% margin is less than Magna International at 5.46%. If you look at Johnson Controls compared to General Electric and United Technologies, these two behemoths sport much better operating margins of 19.27% and 13.93% respectively. While each of these companies have different areas of strength, the lower margin from Johnson Controls will make it difficult for the company to generate significant earnings growth relative to their peers.

Last but not least, and as if Johnson Controls’ relatively low yield wasn’t enough of an issue, Johnson Controls also carries a high payout ratio as well. General Electric is the only company with a higher core free cash flow (net income + depreciation – capital expenditures) payout ratio at 90.42%. Of course the difference is for that higher payout ratio, investors get a significantly higher yield as well. By comparison, Johnson Controls’ payout ratio of 63% is significantly higher than United Technologies at 30.98% and Magna International at 17.06%.

Oh And Here Is A Bonus Issue To Think About
As you can see, Johnson Controls ranks second worst or worst in multiple categories compared to its peers. This might even be acceptable if the company’s valuation reflected these challenges. However, with the shares trading for a P/E ratio that is actually higher than both General Electric and Magna International, and just slightly less than United Technologies, investors seem to be ignoring the obvious.

Johnson Controls might be an okay investment, but given the company’s yield, growth, valuation, and lackluster margins, I don’t see how investors can ignore these issues. This company has problems, and given the alternatives, investors should probably choose to power their portfolio with a different company.

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Chad Henage owns shares of General Electric Company. The Motley Fool owns shares of General Electric Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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