Johnson Controls International plc (JCI) and Jacobs Engineering Group Inc. (J) are two important players in the engineering and construction industry. JCI is an Ireland-based company that provides building products and technology solutions, offering air systems, building management, HVAC controls, security, and fire safety solutions. J offers interior construction management, scientific research and testing, architecture, engineering, and operations and maintenance services. J is based in Pasadena, Calif. Both companies serve industrial, commercial, and governmental clients worldwide.
With an overall grade of C-minus for the quality of U.S. infrastructure given by the American Society of Civil Engineers (ASCE), President Biden proposed $1.2 trillion in infrastructure spending over he next eight years will be used to repair and rebuild water conduits, roads and bridges, build EV charging stations, upgrade broadband infrastructure and support renewable energy to achieve long-term sustainability goals. Because the bipartisan infrastructure plan is expected to be voted on in the U.S. Senate soon, investors are now focusing on the infrastructure sector. Moreover, rising infrastructure activities with the reopening of the economy and increasing demand for smart building technology and design services are buoying investor sentiment about the industry’s growth prospects. The global construction market is expected to grow at a 3.5% CAGR to reach $14.4 trillion by 2026. So, with that, we believe both JCI and J should benefit substantially in the coming months.
While J lost 4.9% over the past month, JCI surged 4.8%. And in terms of past nine months’ performance, JCI is a clear winner with 63% gains versus J’s 35.6% returns. So, which of these stocks is a better pick now? Let’s find out.
On July 7, JCI launched OpenBlue Net Zero Buildings as a Service. The service provides customers with risk management models and guaranteed outcomes to achieve emission reduction goals. JCI’s OpenBlue Net Zero Advisor offering delivers real-time, AI-driven tracking and reporting of sustainability metrics, helping facility managers ensure and prove the net zero carbon reduction and renewable energy impact of their buildings. Because buildings are responsible for approximately 40% of global emissions, JCI’s offerings will increase building performance and value, positively impacting the surrounding community and talent attraction.
On May 20, JCI partnered with DigiCert, a technology company focused on digital security, to provide advanced secure, trusted connectivity for smart building technology. Combining JCI’s expertise in healthy and smart buildings with DigiCert’s trusted digital identity and automated certificate management capabilities should help customers to mitigate the risk of costly operational interruptions due to cybersecurity attacks and enable JCI to further enhance its OpenBlue suite and capitalize on the increasing demand for smart building operations.
J announced on July 8 that it will deliver design services for TasWater’s Bryn Estyn Water Treatment Plant (WTP) Upgrade project in Hobart, Australia. As one of the driest cities in Australia—impacted by a lower-than-average rainfall—this upgrade will establish a new and multi-barrier approach to ensure a safe drinking water supply, increase capacity to 160 mega liters per day to meet anticipated future demand, and improve resilience in supply for the residents of Hobart.
At a $455 million contract value, J was selected by Auckland Transport on July 7 to design and construct three stages of the Eastern Busway project in Auckland, New Zealand. The project is expected to be completed by 2025. Its collaboration with its Eastern Busway Alliance partners and with Auckland Transport, should help J deliver a more efficient transit system for Auckland commuters.
Recent Financial Results
JCI’s revenues for its fiscal second quarter, ended March 31, 2021, increased 2.8% year-over-year to $5.59 billion. The company’s gross profit came in at $1.94 billion, up 7.9% from the prior-year period. Its adjusted net income continuing operations has been reported at $427 million, which represents 29.8% year-over-year improvement. Its adjusted net income increased 17.7% year-over-year to $373 million. And its adjusted EPS increased 23.8% from the prior-year period to $0.52. The company had $1.88 billion in cash and cash equivalents as of March 31, 2021.
For its fiscal second quarter, ended April 2, 2021, J’s adjusted net revenues increased 6.7% year-over-year to $2.97 billion. The company’s adjusted gross profit came in at $767.21 million, which represents an 18.4% rise year-over-year. Its adjusted operating profit has been reported at $311.15 million for the quarter, up 31.6% from the prior-year period. While its adjusted net earnings increased 6.3% year-over-year to $229.61 million, its adjusted EPS increased 8% year-over-year to $1.62. As of March 31, 2021, the company had $893.28 million in cash and cash equivalents.
Past and Expected Financial Performance
JCI’s EBITDA has grown 7.7% over the past year. Analysts expect JCI’s revenue to increase 8% in the current quarter (ending September 30, 2021), 5.6% in the current year and 6.6% next year. Its EPS is expected to increase 15.8% in the current quarter, 18.3% in the current year and 20.8% next year. The stock’s EPS is expected to grow at 17.4% rate per annum over the next five years.
In comparison, J’s EBITDA grew 14.5% over the past year. Analysts expect J’s revenue to increase 9.6% in the current quarter (ending September 30, 2021), 6.3% in 2021, and 8.5% next year. However, its EPS is expected to decline 1.8% in the current quarter but increase 13% in the current year and 14.9% next year. Analysts expect the stock’s EPS to grow at a 13.2% rate per annum over the next five years.
JCI’s trailing-12-month revenue is 1.6 times what J generates. JCI is also more profitable, with a 33.6% gross profit margin versus J’s 19.7%.
Also, JCI’s 14.8% and 12.4% respective EBITDA margin and levered free cash flow margin compare favorably with J’s 8.1% and 7.2%.
In terms of non-GAAP forward PEG, J is currently trading at 2.27x, which is 51.3% higher than JCI’s 1.50x. J’s 16.90x forward EV/EBITDA is 1.3% higher than JCI’s 16.68x.
Also, in terms of trailing-12-month Price-to-Book, J’s 2.92x is 2.8% higher than JCI’s 2.84x.
Thus, JCI is more affordable here.
While J has an overall C grade, which translates to Neutral in our proprietary POWR Ratings system, JCI has an overall B grade, which equates to Buy. The POWR Ratings are calculated considering 118 different factors, each weighted to an optimal degree.
Both JCI and J have a C grade for Quality, which is in sync with their slightly lower-than-industry profit margins. JCI’s 5.6% trailing-12-month return on total capital is 2.1% lower than the 5.7% industry average. In comparison, J has a 5.6% trailing-12-month return on total capital value, which is 2.5% lower than the 5.7% industry average.
JCI has a B grade for Growth. This is justified because the company’s working capital grew 228.3% over the past year, which is higher than the 5.2% industry average. However, J’s D grade for Growth is in sync with its negative working capital growth.
Beyond what we’ve stated above, our POWR Ratings system has also rated both JCI and J for Value, Momentum, Stability, and Sentiment. Get all J ratings here. Also, click here to see the additional POWR Ratings for JCI.
Because the infrastructure industry is expected to witness decent growth, both JCI and J are well-positioned to benefit. However, better profit margins and financials make JCI a better buy here.
Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Rating of Buy or Strong Buy. Click here to access the top-rated stocks in the Industrial – Building Materials industry, and here for those in the Industrial – Services industry.
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JCI shares were trading at $70.24 per share on Monday afternoon, up $0.18 (+0.26%). Year-to-date, JCI has gained 52.05%, versus a 17.50% rise in the benchmark S&P 500 index during the same period.
About the Author: Sweta Vijayan
Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market. More...
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