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Building operations company Johnson Controls (NYSE:JCI) missed analysts' expectations in Q2 CY2024, with revenue up 1.4% year on year to $7.23 billion. It made a non-GAAP profit of $1.14 per share, improving from its profit of $1.03 per share in the same quarter last year.
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Johnson Controls (JCI) Q2 CY2024 Highlights:
- Revenue: $7.23 billion vs analyst estimates of $7.34 billion (1.5% miss)
- EPS (non-GAAP): $1.14 vs analyst estimates of $1.08 (5.2% beat)
- EPS (non-GAAP) Guidance for Q3 CY2024 is $1.25 at the midpoint, above analyst estimates of $1.19
- Gross Margin (GAAP): 34.4%, in line with the same quarter last year
- Free Cash Flow of $922 million is up from -$336 million in the previous quarter
- Organic Revenue rose 3% year on year (9% in the same quarter last year)
- Market Capitalization: $46.5 billion
Founded after patenting the electric room thermostat, Johnson Controls (NYSE:JCI) specializes in building products and technology solutions, including HVAC systems, fire and security systems, and energy storage.
Commercial Building ProductsCommercial building products companies, which often serve more complicated projects, can supplement their core business with higher-margin installation and consulting services revenues. More recently, advances to address labor availability and job site productivity have spurred innovation. Additionally, companies in the space that can produce more energy-efficient materials have opportunities to take share. However, these companies are at the whim of commercial construction volumes, which tend to be cyclical and can be impacted heavily by economic factors such as interest rates. Additionally, the costs of raw materials can be driven by a myriad of worldwide factors and greatly influence the profitability of commercial building products companies.
Sales GrowthA company's long-term performance is an indicator of its overall business quality. While any business can experience short-term success, top-performing ones enjoy sustained growth for multiple years. Regrettably, Johnson Controls's sales grew at a weak 2.4% compounded annual growth rate over the last five years. This shows it failed to expand in any major way and is a rough starting point for our analysis.
Long-term growth is the most important, but within industrials, a half-decade historical view may miss new industry trends or demand cycles. Johnson Controls's annualized revenue growth of 3.9% over the last two years is above its five-year trend, but we were still disappointed by the results.
Johnson Controls also reports organic revenue, which strips out one-time events like acquisitions and currency fluctuations because they don't accurately reflect its fundamentals. Over the last two years, Johnson Controls's organic revenue averaged 5.6% year-on-year growth. Because this number is better than its normal revenue growth, we can see that some mixture of divestitures and foreign exchange rates dampened its headline performance.
This quarter, Johnson Controls's revenue grew 1.4% year on year to $7.23 billion, falling short of Wall Street's estimates. Looking ahead, Wall Street expects sales to grow 6.7% over the next 12 months, an acceleration from this quarter.
Operating MarginOperating margin is a key measure of profitability. Think of it as net income–the bottom line–excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.
Johnson Controls was profitable over the last five years but held back by its large expense base. It demonstrated mediocre profitability for an industrials business, producing an average operating margin of 7.7%. This result is surprising given its high gross margin as a starting point.
On the bright side, Johnson Controls's annual operating margin rose by 5.5 percentage points over the last five years
In Q2, Johnson Controls generated an operating profit margin of 19.3%, up 7.1 percentage points year on year. This increase was solid, and since the company's operating margin rose more than its gross margin, we can infer it was recently more efficient with expenses such as sales, marketing, R&D, and administrative overhead.
EPSWe track the long-term growth in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company's growth was profitable.
Johnson Controls's EPS grew at a remarkable 14.2% compounded annual growth rate over the last five years, higher than its 2.4% annualized revenue growth. This tells us the company became more profitable as it expanded.
We can take a deeper look into Johnson Controls's earnings quality to better understand the drivers of its performance. As we mentioned earlier, Johnson Controls's operating margin expanded by 5.5 percentage points over the last five years. On top of that, its share count shrank by 23.1%. These are positive signs for shareholders because improving profitability and share buybacks turbocharge EPS growth relative to revenue growth.
Like with revenue, we also analyze EPS over a more recent period because it can give insight into an emerging theme or development for the business. For Johnson Controls, its two-year annual EPS growth of 9.8% was lower than its five-year trend. We hope its growth can accelerate in the future.
In Q2, Johnson Controls reported EPS at $1.14, up from $1.03 in the same quarter last year. This print beat analysts' estimates by 5.2%. Over the next 12 months, Wall Street expects Johnson Controls to grow its earnings. Analysts are projecting its EPS of $3.49 in the last year to climb by 11.3% to $3.88.
Key Takeaways from Johnson Controls's Q2 Results We enjoyed seeing Johnson Controls beat analysts' EPS expectations in the quarter. Full-year EPS guidance was also ahead of expectations. On the other hand, its revenue unfortunately missed. Strategically, the company "announced divestitures of our R&LC HVAC and Air Distribution Technologies businesses, representing roughly 20% of sales, marking a pivotal milestone in our transformation into a pure-play provider of comprehensive solutions for commercial buildings and is a significant step to unlock value for our shareholders." Overall, this quarter was still solid. The stock traded up 7.2% to $74 immediately after reporting.
