Is Johnson Controls Stock a Buy?

The market warmed to the recent fiscal 2022 fourth-quarter (ended Sept. 30) results from building technology and heating, ventilation, and air conditioning (HVAC) company Johnson Controls International (JCI -0.33%), sending the stock higher by almost 12% in the two trading days after the report's Nov. 3 release.

Is it now time to book some gains on the stock, or is there still room to run?

The key is Johnson Controls' guidance

The answer to this question is based somewhat on how you interpret the company's full-year fiscal 2023 guidance. Wall Street sees Johnson Controls as growing at an annual rate in the mid-teens over the next couple of years, with the analyst consensus for 2023 earnings per share (EPS) at $3.52. That figure implies a 17% increase over the $3 of adjusted EPS the company just reported for its full-year 2022.

But here's the thing: You could drive a bus through management's guidance for 2023. The guidance range of $3.20 to $3.60 implies growth of 7% to 20%. The latter would make Johnson Controls look like an investing option with fantastic growth at a reasonable price, while the former would make it slightly overvalued as measured by a forward price-to-earnings ratio of 20.

Many investors simply take the midpoint of the guidance range and price that in for valuation purposes. However, that would probably be a mistake in this case, because the guidance range looks conservative.

Discussing the matter on the earnings call, CFO Olivier Leonetti said that "we wanted to give you a bookend of how we will perform in the case we would have a major slowdown of GDP" -- gross domestic product is typically how the financial sector measures the economy at large.

That said, there are a number of arguments that suggest Johnson Controls could have another excellent year, and end up with EPS closer to the high end of the range.

Johnson Controls expects a strong first quarter

Since Johnson Controls' financial year ends on Sept. 30, we're already in the company's first quarter. Fortunately, there's every indication the company will start out strong from the blocks in its financial 2023. Here's the company's formal guidance for the first quarter and for the full year:

Data source: Johnson Controls presentations. A basis point is 1/100 of 1%. EBITA = earnings before interest, taxation, and amoritization.

Management's guidance is backed up by ongoing strength in orders, a record field backlog of $11.1 billion, and very strong pricing power.

Johnson Controls has pricing power

The company's pricing power -- driven by the value of its products in enhancing building efficiency, improving building health, and helping building owners meet their net-zero carbon emissions goals -- is evident in its numbers. Johnson Controls reported 10% organic sales growth in the fourth quarter, with price responsible for 9 of those points and volume for 1 percentage point. During the earnings call, Leonetti said that he was modeling "10% of price and about 1% of volume growth" for the full year, and that for the first quarter, "the volume would be much higher, about 3%, with the price being about 10%."

Conservative guidance

Clearly, the guidance implies lower volume growth after the first quarter. When asked about the matter during the earnings call, Leonetti said he had greater "visibility" in the first quarter and noted that he was planning "a lower level of volume based upon us being prudent. And that prudence is also reflected in the guide in the second half as well in the best case."

The prudence is understandable in an uncertain economic environment, but the company's order progression remains strong. Trailing-three-month field orders were up 9% in the fourth quarter. CEO George Oliver noted that management was "projecting a very strong Q1 with orders"; Leonetti said "orders remained strong, ending into Q1 with low double-digit organic growth expected."

Meanwhile, management expects the supply chain to normalize in the middle of 2023 -- something that should ease cost pressures and make it easier to execute on backlog and on orders.

A stock to buy?

A record backlog, ongoing strength in orders (at least for now), the easing of supply chain pressures, and excellent pricing power all support the argument that management is being conservative with guidance. That means the stock remains an attractive option for investors.