Johnson Controls Earnings: Order Growth Accelerates but Market Skeptical of 2024 Guidance

Shares of Johnson Controls traded 7% lower on May 1, following the firm’s fiscal second-quarter earnings release. While the narrow-moat-rated manufacturer of climate control and fire and security solutions reported solid margin expansion and accelerating order growth, we believe investors were skeptical that it can achieve its full-year guidance of mid-single-digit percentage organic growth. The company delivered just 1 percentage point of organic growth during its fiscal second quarter and forecast low-single-digit third-quarter organic growth. Furthermore, Johnson Controls reported a GAAP net loss due to a $750 million charge to settle PFAS contamination litigation, a $230 million goodwill impairment charge, and a $33 million charge to remediate a product quality issue. As discussed in our April 12 analyst note, the cash outflow tied to the PFAS settlement isn’t large enough to affect our fair value estimate, and we like that the firm has resolved a good portion of its potential liability. In our view, Johnson Controls remains a “show-me story” in terms of its ability to consistently deliver strong financial performance in line with high-quality peers, and we’d expect to see fewer nonrecurring charges, such as the impairment and product quality issues.