Strong Organic Growth Results In Earnings Beat For Johnson Controls

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Johnson Controls¬†( JCI ) delivered a positive earnings surprise in its first quarter 2018 (quarter ended December 2017), posting earnings of $0.54 on revenues of $7.44 billion. This was a result of impressive organic top-line growth in the buildings segment (4%), helped by an easy comparison against the prior year corresponding quarter. The solid growth in this segment can be expected throughout the financial year, given the promising underlying trends. However, the adjusted EBIT was negatively impacted by the Scott Safety sale and anticipated headwinds from lower gross margins and incremental investments, causing a 1% decline in the metric, more than offsetting the benefits received from costs synergies and productivity initiatives. Despite this decline, the company managed to grow its EPS, helped by the synergies and productivity, which added $0.05 to the prior year’s EPS, and volume and mix, which had a similar positive impact.

We have a $48 price estimate for Johnson Controls , which is higher than the current market price. The charts below have been made using our new, interactive platform. You can click here to modify the different revenue drivers and P/E multiple to gauge their impact on JCI’s EPS and price estimate.

Favorable Macroeconomic Environment Helps Johnson Controls

Rising GDP across most of the key geographic regions resulted in a conducive macroeconomic environment. This helped the company in the following ways:

  • North American non-residential construction market grew steadily, led by the institutional vertical.
  • Recent strength in Asia, the Middle East, and North America resulted in a strong global demand for JCI’s HVAC equipment.
  • Rebound in the global oil prices helped to ease budget constraints in the Middle East, aiding the release of some large infrastructure projects in the region.
  • With China being one of the fastest growing regions, JCI focused on developing innovative products, and expanding its presence, gaining market share as a result.
  • Increasing electrification of vehicles resulted in an expanded adoption of the company’s start-stop technologies globally. This was reflected in the global shipments of start-stop batteries increasing 20%, with another quarter of strong growth in the Americas and China.

This encouraging global environment should aid JCI in continued revenue growth momentum through FY 2018.

Order Growth To Continue In Buildings North America, While Pricing Pressure Will Remain In China

  • North America: Sales grew 3% organically to $2 billion, led by high single-digit growth in the commercial HVAC and controls businesses and mid-single-digit growth in the solutions businesses, while fire and security field revenues declined modestly in the quarter. While EBITDA was flat in the quarter, the margin declined 50 basis points due to an 80 basis point headwind from lower margin backlog conversion and a headwind from sales force additions. On the other hand, orders were up 4%. This growth can be expected to continue through the year, given the positive underlying trends, as mentioned previously.
  • Europe, Middle East, Africa, and Latin America (EMEA/LA): Sales increased 4%, with solid performance across all the regions. This segment was able to deliver EBITDA and EBITDA margin growth, primarily driven by cost synergies and productivity, as well as modest volume leverage.
  • Asia Pacific (APAC): Sales were up 2% organically, which is a little bit disappointing given the presence of high growth regions such as China and India within this segment. The company noted that pricing remained pressured in China as a result of a high level of competition. However, the company is undertaking steps, such as those mentioned earlier, and will focus on cost actions to reduce the pressure on margins. On the other hand, orders were up an impressive 9%, driven by strong growth in China, Northeast Asia, and India.

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