Update on Johnson Controls’ 3Q24- More Red Flags

The activists may be involved- but you should still be aware of the warning signs

We first wrote on Johnson Controls (JCI) in our March piece Warning Signs at Johnson Controls in which we expressed concerns about the delay in the workdown of inventory, the threat of lower prices, along with multiple earning quality red flags. The stock price has held up well due to expectations for significant change driven by the announcement of the sale of its HVAC assets, the departure of the CEO, and the revelation of a large stake taken by activist investor Elliot Management. These developments may drive the stock price for the foreseeable future. Nevertheless, we believe it is beneficial to explore the risks that remain for near-term growth.

JCI’s adjusted EPS of $1.14 for June (fiscal 3Q24) beat by 6 cents. However, investors do well to follow trends in long-term guidance to put recent earnings “beats” into perspective. After 2Q results, JCI issued guidance for 3Q24 of $1.05-$1.10 which was below the consensus estimate at the time of $1.13. Therefore, JCI’s third-quarter EPS topped the original guidance by only 1 cent which is a more common size of beat for JCI. Also, while JCI tightened guidance for fiscal 2024 by taking 6 cents off the top and raising the bottom range by 6 cents to $3.66-$3.69 – this is still below the guidance it started the year with of $3.65-$3.80. Plus, the current guidance assumes a 110bp improvement to EBITA margin vs only a 25bp increase at the start of the year. Clearly, the company’s outlook for growth is below where it was at the beginning of the year yet and we continue to see unsustainable benefits that boosted 3Q24 results.

Let’s get behind the numbers…

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