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Ford Motor Company (F), General Motors Company (GM): Is Johnson Controls, Inc. (JCI) Destined for Greatness?

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Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Johnson Controls, Inc. (NYSE:JCI) fit the bill? Let’s take a look at what its recent results tell us about its potential for future gains.

Johnson Controls Inc (NYSE:JCI)

What we’re looking for
The graphs you’re about to see tell Johnson Controls, Inc. (NYSE:JCI)’s story, and we’ll be grading the quality of that story in several ways:

  • Growth: Are profits, margins, and free cash flow all increasing?
  • Valuation: Is share price growing in line with earnings per share?
  • Opportunities: Is return on equity increasing while debt to equity declines?
  • Dividends: Are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let’s take a look at Johnson Controls, Inc. (NYSE:JCI)’s key statistics:

JCI Total Return Price Chart

JCI Total Return Price data by YCharts

Passing Criteria Three-Year* Change Grade
Revenue growth > 30% 27% Fail
Improving profit margin (37.5%) Fail
Free cash flow growth > Net income growth (25.4%) vs. (20.6%) Fail
Improving EPS (23.9%) Fail
Stock growth + 15% < EPS growth 60.9% vs. (23.9%) Fail

Source: YCharts. * Period begins at end of Q2 2010.

JCI Return on Equity Chart

JCI Return on Equity data by YCharts

Passing Criteria Three-Year* Change Grade
Improving return on equity (38.8%) Fail
Declining debt to equity 38.8% Fail
Dividend growth > 25% 46.2% Pass
Free cash flow payout ratio < 50% 49.8% Pass

Source: YCharts. * Period begins at end of Q2 2010.

How we got here and where we’re going
Things don’t look good for Johnson Controls, Inc. (NYSE:JCI) today. The auto-parts manufacturer musters only two out of nine passing grades, and both of those were earned on dividend metrics that might soon be threatened as well. Despite this broad-based financial weakness, Johnson’s shareholders have enjoyed solid growth over the past three years. Is this rebound sustainable, or will Johnson’s fundamentals catch up to it in the end? Let’s take a closer look.

Johnson Controls, Inc. (NYSE:JCI)’s building efficiency and automotive experience business outperformed in the Asia-Pacific region during its most recently reported quarter, but sluggish economic growth in the United States and ongoing weakness across Europe has impeded the company’s progress. Fool contributor Sean Williams notes that a recent slowdown in government spending could further hinder Johnson’s U.S. business. With both India and China now expected to slow down in the coming quarters, the company can ill afford to endure Western weakness for much longer.

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