Wall Street Thinks This Large-Cap Dividend Stock Will Grow 18% Next Year

Based on Wall Street estimates, heating, ventilation, air conditioning (HVAC), fire and security, and building-controls company Johnson Controls (JCI -1.36%) is a highly attractive stock to buy. Analysts predict significant earnings, free cash flow (FCF), and profit-margin expansion for its fiscal 2023. As a result, the stock's valuation will look extremely compelling if the company hits the consensus forecast. Here's why Johnson Controls deserves a place in a diversified investor's portfolio. 

What Wall Street expects

Here's a look at the numbers forecast by Wall Street, with a reminder that its financial year ends on Sep. 30, so it's already trading in its fourth quarter as I write. The table below shows the key figures. Note the decline in FCF in 2022 and then the sharp increase in profit margin in 2023 and 2024, accompanied by solid growth in profit and FCF in 2023 and 2024. 

I'll come to the margin expansion in a moment, but first, a few words on FCF because Johnson Controls' FCF dynamics are pretty common in the current environment. Many industrial companies, including General Electric and Stanley Black & Decker, face FCF constraints in 2022 due to high prices for materials (inventory) when commodity/raw materials prices surged. Since it takes time to pass on costs in the form of higher prices and to book revenue, more cash will be tied up in the form of working capital (notably inventory). According to CFO Olivier Leonetti on the earnings call, FCF conversion (from net income) will be 80% in 2022 (compared to previous guidance for 90%), but "inventory will go down" and "we are totally convinced that we will be able to go back to the 100%." 

It's a reasonable assumption because as raw material price growth moderates and industrial companies receive more revenue (from higher prices to customers), the FCF situation will flip. 

Data source: Marketscreener.com. 

Johnson Controls margin expansion

Moreover, there are five good reasons to believe the company's profit margin will expand in the coming years.

First, the company's end markets remain strong. Only 17% of its sales go to the residential market, with the rest going to commercial (29%), industrial (18%), institutional (18%), and government (9%) customers. In the current environment of slowing consumer spending, that's probably a good thing; commercial sales remain strong. For example, a rival company, Honeywell International (HON -1.08%) recently upgraded its full-year sales guidance for its Honeywell Building Technologies segment to "double-digits," having started the year predicting "high single-digit" growth. 

Second, management confirmed that its plan to cut combined sales, general, administrative (SG&A), and cost of goods sold (COGS) costs by $230 million in fiscal 2022 was on track, with "$170 million in cost savings year-to-date" according to CEO George Oliver, with more to come in 2023.

Third, while supply chain disruptions will still create cost headwinds in Q4 of some $35 million, according to Leonetti , Oliver also noted that price/cost "inflected positive for the first time this year" in the third quarter. Furthermore, as supply chain issues ease, Johnson Controls has a margin-expansion opportunity. 

Fourth, trailing-3-month orders were up 11% in Q3, and the backlog grew sequentially and 13% on a year-over-year basis to a record figure of $11.1 billion. This gives Johnson Controls plenty of backlog to execute against and generate revenue from.

Finally, as more semiconductors become available, the company will be able to deliver more higher-margin electronic systems and controls, which should positively impact profit margin in the future. 

Meanwhile, the long-term case for the stock remains intact as a play on net-zero carbon emissions and digital improvements in building efficiency. 

Looking ahead

There's little doubt that Johnson Controls stands relatively well, and if it hits analyst numbers, then 15 times FCF in 2023 represents excellent value. However, if a sharp recession comes, it will inevitably see some demand deterioration. Aside from that qualification, Johnson Controls is a highly attractive stock.