Johnson Controls Earnings: Robust Commercial HVAC Demand Propels Strong Q2 Performance

Narrow-moat-rated Johnson Controls JCI continues to execute well amid a backdrop of strong demand for its commercial heating, ventilation, and air-conditioning products and solutions. Our outlook for mid-single-digit organic revenue growth and 100-150 basis points of adjusted operating margin expansion (relative to 2023) over the next five years remains intact. However, we raised our fair value estimate roughly 3% to $72 per share due to the time value of money since our last update. The market reacted favorably to Johnson Controls’ above-FactSet-consensus fiscal second-quarter revenue and adjusted EPS and modest upward revision to its full-year 2023 financial targets. Still, the stock trades more than 10% below our new $72 fair value estimate.

Fiscal second-quarter organic revenue grew 13% year over year to $6.7 billion, adjusted segment EBITA margin expanded 120 basis points to 13.8%, and adjusted EPS increased 19% to $0.75.

Global commercial HVAC organic revenue (42% of 2022 sales) increased by a high-teens percentage year over year. Sales of larger, more-complex applied commercial HVAC systems increased 20%, while light commercial sales increased by a high-teens percentage. We’re pleased to see that both service and digital-related revenue grew at a healthy clip during the quarter. We expect this trend will continue, and these higher-margin revenue streams should support future margin expansion.

Johnson Controls’ second-largest business, fire and security (38% of 2022 sales) increased by a low-double-digit percentage with continued strong demand for fire detection products. After booming demand over the last two years, North American residential HVAC shipments are moderating like we expected. Sales for this business declined by a high-teens percentage for Johnson Controls, but fortunately, it only represents 5% of the firm’s consolidated revenue.