This building controls company has near and long-term growth prospects.
Net zero targets and digital technology are driving Johnson Controls’s growth
Lee Samaha (Johnson Controls): The company manufactures and sells heating, ventilation, air conditioning, refrigeration (HVACR) systems, fire & security products, and building controls.
Given the concerns around the commercial office market in the U.S. (rising interest rates and worries over regional bank exposure to commercial real estate loans), management took the time to address its exposure during the last earnings call. CEO George Oliver noted that the commercial office sector “represents a small portion of our overall business.” CFO Olivier Leonetti confirmed that the company had low single-digit exposure (in terms of overall revenue share) to the new commercial office build market.
Those facts go a long way to explain how the company maintained positive earnings momentum in its second quarter. I have three takeaways:
- Building solutions orders increased 8% organically year over year in the second quarter, and the backlog rose 9%.
- Adjusted earnings before interest and taxation (EBIT) margin rose to 10.7% from 10% a year earlier, as the pricing increases worked into the backlog in 2022 are coming through as the company delivers on it.
- Johnson Controls continues to make progress on digital upgrades as it grows revenue from connected devices that help improve building productivity and reduce carbon emissions.
The company has good near-term momentum from orders growth, backlog, and margin expansion. Furthermore, the adoption of smart building technology and the desire to meet net-zero emissions commitments ensures long-term growth for Johnson Controls. Trading on 17 times full-year estimated earnings, Johnson Controls looks like a good stock to buy now.
