Johnson Controls International plc (JCI) stock intrinsic value fair value estimate & owner earnings analysis

Johnson Controls designs, installs and services the equipment that heats, cools, secures and protects large buildings: commercial HVAC (including York chillers and data-centre cooling), building controls and the OpenBlue software platform, fire detection and suppression (Tyco, SimplexGrinnell) and security systems. After selling its residential and light-commercial HVAC business to Bosch in July 2025, it is now a purely commercial business reporting three regions: Americas ($15.8 billion of fiscal 2025 sales), Europe/Middle East/Africa ($5.0 billion) and Asia-Pacific ($2.8 billion). A large share of earnings comes from servicing an installed base of equipment under multi-year contracts, which is steadier than new construction work. How we measured earnings. We start from operating cash flow of the continuing business, strip out swings in receivables, inventory, payables and other operating assets, and deduct stock compensation and the capital spending needed to maintain the business (capital spending runs at only about 2% of sales). We do count cash tax payments as a real cost rather than a timing swing. On that basis, owner earnings per share were $1.63 (2022), $2.73 (2023), $2.14 (2024) and $3.31 (2025). Only these four years describe today's company; earlier years included the residential business and, before 2019, the automotive battery business. For valuation we work with cash flow before interest, which was about $1.4 billion, $2.2 billion, $1.8 billion and $2.5 billion in those four years. We anchor on roughly $2.0 billion, the middle of that range, not the strong 2025 figure. Non-cash restructuring and impairment charges, which have been large and recurring (about $400-830 million a year), are added back, but the cash spent on restructuring is fully counted. The first half of fiscal 2026 supports the anchor: operating cash flow of $1.28 billion against $0.80 billion a year earlier, sales up about 7.5% and backlog-style contracted obligations up from $22.7 billion to $26.3 billion. Debt. At March 2026 the company owed about $9.5 billion (long-term notes, commercial paper and term loans) against $0.7 billion of cash. Much of the debt is cheap and long: euro notes at 0.375%-3% maturing 2027-2033, dollar notes at 1.75%-2% due 2030-2031, and long bonds at 4.5%-4.95% running to 2047 and 2064. We credit about $1.2 billion of value for that below-market financing, leaving roughly $7.65 billion (about $12.50 a share) to subtract. No near-term maturity is large relative to cash flow; the biggest single item is $566 million due within a year. Operating leases are left out because their cost is already in cash flow. The firefighting-foam liability. Tyco Fire Products and Chemguard face more than 12,400 individual or mass actions, 49 putative class actions, seven Canadian class actions and state attorney-general suits over PFAS from AFFF foam. The company paid $750 million to settle public water-system claims (final payment December 2024) and says it cannot estimate losses on the rest. This is the most important unresolved item in the analysis. Base case ($51.73 a share). Cash flow before interest of about $2.1 billion next year, growing 5% for two years (below the 37% jump in fiscal 2025, which was helped by the end of the receivables drag and strong data-centre work) and then about 1.5% a year, roughly the pace the business has shown in dollar terms over a decade of portfolio changes. We assume a further $750 million of foam settlements paid over three years. Growth beyond that is not credited: management's margin targets and data-centre expansion are not yet demonstrated over a cycle. The business is worth about $39.4 billion, owes about $7.65 billion, leaving about $31.8 billion for shareholders. Bear case ($31.45). Commercial construction and project work fall as they did in the 2008-2010 downturn, when the company's building-efficiency profits dropped by roughly a third; we cut cash flow 30% for two years and take two more years to recover, with no growth thereafter. On top of that, foam claims cost a further $2.25 billion over three years, three times the water-system settlement. Even at the trough the business covers its roughly $320 million of annual interest. Business value about $27.0 billion, debt $7.65 billion, equity about $19.3 billion. Bull case ($95.17). The fiscal 2025-2026 cash level of about $2.45 billion proves sustainable as the service base and the $26 billion contracted backlog convert, growing 6% for two years and about 3% thereafter, with foam claims resolved without further material cost. Business value about $66.1 billion, equity about $58.4 billion. Margin-of-safety price. We are moderately confident in the earnings level: four comparable years range from $1.4 to $2.5 billion, so the true level is uncertain by perhaps 20% either way, and fiscal 2025 coincided with an unusually strong data-centre cycle. The worst plausible outcome is a multi-billion-dollar foam verdict or settlement arriving during a construction downturn; with $9.5 billion of mostly long-dated, low-cost debt and a large recurring service base, the company would survive that, though shareholders would bear it. If we are wrong about the anchor (closer to $1.6 billion), the foam bill (several billion more) and the downturn at once, the shares would be worth something in the mid-$20s. In the meantime the company pays a dividend of about $1.60 a share and has been retiring stock. From $27 a share, the bear case implies a modest gain, and a return to the base case over three to four years plus dividends implies better than 20% a year; above that, the bear case starts to erode the margin required. Previous figures published for this company were built on a different measurement basis and are not comparable.