Yahoo Finance What Does Johnson Controls International plc’s (NYSE:JCI) PE Ratio Tell You?
This analysis is intended to introduce important early concepts to people who are starting to invest and want to learn about the link between company’s fundamentals and stock market performance.
Johnson Controls International plc (NYSE:JCI) is currently trading at a trailing P/E of 15.3x, which is lower than the industry average of 21.3x. While JCI might seem like an attractive stock to buy, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. In this article, I will explain what the P/E ratio is as well as what you should look out for when using it.
See our latest analysis for Johnson Controls International
What you need to know about the P/E ratio
A common ratio used for relative valuation is the P/E ratio. By comparing a stock’s price per share to its earnings per share, we are able to see how much investors are paying for each dollar of the company’s earnings.
P/E Calculation for JCI
Price-Earnings Ratio = Price per share ÷ Earnings per share
JCI Price-Earnings Ratio = $37.37 ÷ $2.445 = 15.3x
On its own, the P/E ratio doesn’t tell you much; however, it becomes extremely useful when you compare it with other similar companies. We preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to JCI, such as capital structure and profitability. A common peer group is companies that exist in the same industry, which is what I use. Since JCI’s P/E of 15.3 is lower than its industry peers (21.3), it means that investors are paying less for each dollar of JCI’s earnings. This multiple is a median of profitable companies of 24 Building companies in US including China Lesso Group Holdings, Noda and Compagnie de Saint-Gobain. One could put it like this: the market is pricing JCI as if it is a weaker company than the average company in its industry.
Assumptions to watch out for
However, it is important to note that this conclusion is based on two key assumptions. The first is that our “similar companies” are actually similar to JCI, or else the difference in P/E might be a result of other factors. For example, if you compared lower risk firms with JCI, then investors would naturally value it at a lower price since it is a riskier investment. The second assumption that must hold true is that the stocks we are comparing JCI to are fairly valued by the market. If this is violated, JCI’s P/E may be lower than its peers as they are actually overvalued by investors.
What this means for you:
If your personal research into the stock confirms what the P/E ratio is telling you, it might be a good time to add more of JCI to your portfolio. But keep in mind that the usefulness of relative valuation depends on whether you are comfortable with making the assumptions I mentioned above. Remember that basing your investment decision off one metric alone is certainly not sufficient. There are many things I have not taken into account in this article and the PE ratio is very one-dimensional. If you have not done so already, I highly recommend you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for JCI’s future growth? Take a look at our free research report of analyst consensus for JCI’s outlook.
Past Track Record: Has JCI been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of JCI’s historicals for more clarity.
Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
