What happened
Shares of building products company Johnson Controls (JCI 0.66%) declined 10.6% in January, according to data provided by S&P Global Market Intelligence. The decline came in line with a general market sell-off and a more pronounced sell-off in building product companies.
The sector underperformed mainly due to worsening sentiment around the extra supply chain and raw material costs likely to be incurred due to the resurgence of coronavirus cases over the winter.
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Heating, ventilation, air-conditioning (HVAC), and building products (fire and security) have heavy exposure to raw materials like steel, aluminum, polypropylene, and copper. In addition, manufacturing is a labor-intensive activity, and Johnson Controls was subject to labor and component shortages in fiscal 2021.
So what
With the release of the first-quarter 2022 earnings in early February, investors learned that Johnson Controls was hit with extra costs in the quarter to the end of December. During the earnings call, CFO Olivier Leonetti said the difference between increases in prices and costs was a negative $15 million, and disruptions to its field operations caused by supply chain disruptions and labor shortages caused a further $18 million hit to profits. These figures are compared to segment earnings before interest, taxation, and amortization (EBITA) of $723 million in the quarter.
However, due to a more robust pricing environment and good demand for its products, management maintained its full-year earnings guidance for EPS in the range of $3.33 to $3.32. Moreover, adjusted EPS in the first quarter came in at $0.54, right at the top end of prior guidance for $0.52 to $0.54.
In short, Johnson Controls managed to offset the margin pressure in the first quarter and is on track for its 2022 guidance. In addition, Leonetti expects the cost "headwinds are going to start to be better as we go through the year." He also said that the bookings taken recently were at a higher rate and that this will positively contribute to profit margins later in the year.
Now what
Management expects organic revenue growth of 8% to 10% in fiscal 2022 as the company benefits from commercial building owners retrofitting properties to meet their carbon emission targets. Furthermore, Johnson Controls helps building owners ensure healthy, clean working environments -- a service likely to be in long-term demand due to the pandemic.
Investors will hope the cost pressures decrease through 2022 as Johnson Controls meets its sales growth targets.
