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Johnson Controls (JCI) Up 7.9% Since Last Earnings Report: Can It Continue?

Zacks Equity Research

It has been about a month since the last earnings report for Johnson Controls (JCI). Shares have added about 7.9% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Johnson Controls due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Johnson Controls Q2 Earnings Surpass Estimates, Up Y/Y

Johnson Controls reported adjusted earnings per share of 42 cents in second-quarter fiscal 2020, surpassing the Zacks Consensus Estimate of 38 cents. The reported figure also comes in higher than the prior-year quarter’s 32 cents per share. This outperformance was mainly aided by higher EBITA from the company’s Building Solutions Europe, Middle East, Africa/Latin America segment.

Johnson Controls reported revenues of $5,444 million, down 6% year over year, in the fiscal second quarter. The revenue figure also missed the Zacks Consensus Estimate of $5,536 million. Gross profit increased to $1.8 billion from the year-earlier quarter’s $1.72 billion.

Selling, general and administrative expenses in the fiscal second quarter totaled $1,451 million, lower than the prior-year quarter’s $1,458 million.

Segmental Results

Building Solutions North America: This segment’s adjusted revenues came in at $2,175 million, down from the year-ago quarter’s $2,187 million on decline in HVAC & Controls and Fire & Security. The segment’s EBITA decreased to $253 million from the $259 million reported in second-quarter fiscal 2019 on dismal volume.

Building Solutions Europe, Middle East, Africa/Latin America: Adjusted revenues in this segment came in at $850 million, down 3% year over year, due to decline in project installations, HVAC & Controls and Fire & Security. The segment’s EBITA was $85 million, up from the second-quarter fiscal 2019 level of $81 million. This upswing was mainly driven by cost synergies and productivity savings.

Building Solutions Asia Pacific: Adjusted revenues decreased to $525 million from the year-ago quarter’s $628 million due to decline in project installations and services. Moreover, the sharp decline in China was predominately within HVAC & Controls. This segment’s EBITA was $65 million, down from the second-quarter fiscal 2019 level of $76 million on lower volume.

Global Products: Adjusted revenues in this segment increased to $1,894 million from the prior year’s $2,086 million, mainly due to lower sales within HVAC & Refrigeration Equipment and Specialty Products. This segment’s EBITA was $216 million, down from the second-quarter fiscal 2019 level of $255 million due to dismal volume.

Financial Position

Johnson Controls had cash and cash equivalents of $1 billion as of Mar 31, 2020, down from $2.81 million as of Sep 30, 2019. Long-term debt declined to $5.64 billion in the reported quarter from $6.71 billion as of Sep 30, 2019. The debt-to-capital ratio stands at 31.2%.

In the fiscal second quarter, the company suspended its existing share-repurchase program until further notice on the heightening coronavirus scare.

2020 Guidance

Johnson Controls scrapped the fiscal 2020 guidance as it expects that the pandemic’s impact will strain the company’s operations in the days to come.

The company now projects fiscal 2020 organic revenues to be down 15-20%. It has reduced production levels and implemented a company-wide cost-reduction plan that targets $400-$450 million in savings in response to the pandemic and related setbacks.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates review. The consensus estimate has shifted -9.29% due to these changes.

VGM Scores

Currently, Johnson Controls has a subpar Growth Score of D, however its Momentum Score is doing a bit better with a C. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Johnson Controls has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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