Johnson Controls International plc (NYSE: JCI) intrinsic value is potentially 21% lower over its share price
Does Johnson Controls International plc (NYSE: JCI) August share price reflect true value? Today, we’re going to estimate the intrinsic value of the stock by estimating the company’s future cash flows and discounting them to their present value. To this end, we will take advantage of the Discounted Cash Flow (DCF) model. Don’t be put off by the lingo, the math is actually pretty straightforward.
Remember, however, that there are many ways to estimate the value of a business, and a DCF is just one method. If you want to know more about discounted cash flow, the rationale for this calculation can be read in detail in the Simply Wall St.
Check out our latest review for Johnson Controls International
The calculation
We’re going to use a twostage DCF model, which, as the name suggests, takes into account two growth stages. The first stage is usually a period of higher growth which stabilizes towards the terminal value, captured in the second period of “steady growth”. To begin with, we need to get cash flow estimates for the next ten years. Where possible, we use analyst estimates, but when these are not available, we extrapolate the previous free cash flow (FCF) from the last estimate or stated value. We assume that companies with decreasing free cash flow will slow their rate of contraction, and companies with increasing free cash flow will see their growth rate slow during this period. We do this to reflect the fact that growth tends to slow down more in the early years than in subsequent years.
In general, we assume that a dollar today is worth more than a dollar in the future, so we discount the value of these future cash flows to their estimated value in today’s dollars:
10year free cash flow (FCF) forecast
2022 
2023 
2024 
2025 
2026 
2027 
2028 
2029 
2030 
2031 

Leverage FCF ($, Millions) 
US $ 2.41 billion 
2.84 billion US dollars 
3.12 billion US dollars 
3.15 billion US dollars 
3.19 billion US dollars 
US $ 3.23 billion 
US $ 3.28 billion 
3.34 billion US dollars 
US $ 3.40 billion 
3.46 billion US dollars 
Source of estimated growth rate 
Analyst x10 
Analyst x8 
Analyst x4 
Analyst x2 
Is @ 1.2% 
Est @ 1.44% 
Is 1.6% 
Est @ 1.72% 
Is 1.8% 
Est @ 1.86% 
Present value (in millions of dollars) discounted at 8.9% 
US $ 2.2k 
$ 2.4,000 
$ 2.4,000 
US $ 2.2k 
US $ 2.1k 
US $ 1.9k 
US $ 1.8k 
US $ 1.7k 
US $ 1.6k 
US $ 1.5k 
(“East” = FCF growth rate estimated by Simply Wall St)
10year present value of cash flows (PVCF) = US $ 20 billion
It is now a matter of calculating the Terminal Value, which takes into account all future cash flows after this tenyear period. For a number of reasons, a very conservative growth rate is used that cannot exceed that of a country’s GDP growth. In this case, we used the 5year average of the 10year government bond yield (2.0%) to estimate future growth. Similar to the 10year “growth” period, we discount future cash flows to their present value, using a cost of equity of 8.9%.
Terminal value (TV)= FCF_{2031} × (1 + g) ÷ (r – g) = US $ 3.5B × (1 + 2.0%) ÷ (8.9% – 2.0%) = US $ 51B
Present value of terminal value (PVTV)= TV / (1 + r)^{ten}= US $ 51 billion ÷ (1 + 8.9%)^{ten}= US $ 22 billion
The total value is the sum of the cash flows for the next ten years plus the final present value, which gives the total value of equity, which in this case is US $ 42 billion. To get the intrinsic value per share, we divide it by the total number of shares outstanding. Compared to the current share price of US $ 74.6, the company appears slightly overvalued at the time of writing. Remember, however, that this is only a rough estimate, and like any complex formula – trash in, trash out.
Important assumptions
The above calculation is very dependent on two assumptions. One is the discount rate and the other is cash flow. You don’t have to agree with these entries, I recommend that you redo the calculations yourself and play with them. The DCF also does not take into account the possible cyclicality of an industry or the future capital needs of a company, so it does not give a full picture of a company’s potential performance. Since we view Johnson Controls International as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which takes into account debt. . In this calculation, we used 8.9%, which is based on a leveraged beta of 1.241. Beta is a measure of the volatility of a stock relative to the market as a whole. We get our average beta from the industry beta of comparable companies globally, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable company.
Looking forward:
While a business valuation is important, it shouldn’t be the only metric you look at when researching a business. It is not possible to achieve a rocksolid valuation with a DCF model. Preferably, you would apply different cases and assumptions and see their impact on the valuation of the business. For example, if the terminal value growth rate is adjusted slightly, it can dramatically change the overall result. What is the reason why the stock price exceeds intrinsic value? For Johnson Controls International, we have compiled three essential factors that you should take a closer look at:

Risks: Consider, for example, the everpresent specter of investment risk. We have identified 2 warning signs with Johnson Controls International and understanding them should be part of your investment process.

Future benefits: How does JCI’s growth rate compare to its peers and the broader market? Dig deeper into the analyst consensus number for years to come by interacting with our free analyst growth expectations chart.

Other high quality alternatives: Do you like a good allrounder? Explore our interactive list of highquality stocks to get a feel for what you might be missing!
PS. The Simply Wall St app performs a daily discounted cash flow assessment for every NYSE share. If you want to find the calculation for other actions, just search here.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you longterm, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
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