What happened to Johnson Controls stock in 2022
Building controls, systems, heating, ventilation, air conditioning, and refrigeration (HVACR) company Johnson Controls (JCI 1.02%) had an eventful year. After a decline in the first half, the stock came roaring back with a nearly 34% increase in the second half.
The first-half decline was primarily due to management's decision to cut its full-year 2022 profit margin and earnings guidance. However, the supply chain disruptions and component availability issues were more significant than expected. For example, the company's controls systems, which tend to carry higher margins, use semiconductors and other IT components that became difficult to acquire, with the result that Johnson Controls couldn't ship as much product as it wanted.
Why the stock recovered
Still, the company continued to report solid order growth and a record backlog and pushed through some impressive price increases through the rest of its financial 2022.
As such, the market became increasingly aware that Johnson Controls' problem was an inability to supply, not a lack of demand. When the supply chain issues slowly ease, the company can deliver products and earnings -- not least from the higher-margin products in the backlog.
Where next in 2023?
The debate around the stock has naturally moved on to what to expect in calendar 2023 from its end markets, specifically its order book. Johnson Controls is heavily weighted toward nonresidential construction. Bulls see that market holding up, supported by investment in sustainability; its building controls and software help building owners meet their carbon emissions goals and improve productivity, and its HVACR solutions offer an efficiency upgrade. Meanwhile, the infrastructure bill could provide the industry a shot in the arm, spurring investment.
In contrast, the bears point out the historical relationship whereby nonresidential construction spending lags residential construction, concluding that the shoe will drop on the former in 2023. The rational argument here is that nonresidential construction is often built up around residential construction as new communities grow and existing communities expand and invest.
In my view, until companies like Johnson Controls, Honeywell's building technology business, or even Johnson's HVACR peers such as Carrier or Trane start reporting a sharp decrease in orders, it makes sense to stay positive on Johnson Controls. The valuation is attractive, and its long-term earnings drivers -- sustainability, along with productivity enhancement as building owners retrofit equipment -- are appealing.
