A value opportunity in a stock down nearly 19% this year.
Johnson Controls can climb a wall of worry
Lee Samaha: Heating, ventilation, and air conditioning (HVAC), building controls, and fire and security products company Johnson Controls has work to do to rebuild confidence with investors. After disappointing investors in August with its third-quarter earnings report, management did the same again in the recent, delayed, fourth-quarter earnings report.
The results were delayed due to assessing the impact of a cyber attack on its operations, and there was an impact. Still, it wasn’t enough to completely explain the revenue and earnings miss in the quarter. For example, management had guided towards adjusted EPS of $1.10 in the fourth quarter only to deliver $1.05 with a $0.04 negative impact from the cyber attack.In addition, management’s adjusted EPS guidance of $3.65-$3.80 for fiscal 2024 was weaker than Wall Street analysts’ consensus expectation of $3.96.
But here’s the thing. It’s not that Johnson Controls’ growth isn’t strong, it’s more that it isn’t quite as strong as management and the market had previously thought. For example, the midpoint of the 2024 earnings guidance puts the stock on 14 times earnings and around 16.5 times free cash flow (FCF).
Those are attractive multiples of a coming growing revenue in the mid-single digit range. In addition, the company’s install orders grew by 9% in the quarter, taking the install backlog up 8% year over year. It’s a key metric to follow because building solution equipment installations tend to lead to building solution services and global product sales.
That’s positive news, but the company will still have to overcome the negative impact of the cyber attack in the first quarter, weak global product sales (as dealers continue to rebalance their inventory after building them up during the pandemic), and ongoing weakness in residential HVAC sales.
Still, there’s an opportunity for Johnson Controls to regain the trust of investors by hitting its 2024 guidance. If it can do so, the stock could be notably higher this time next year.
