These two companies reported excellent results recently and raised their full-year 2023 earnings guidance. Moreover, the long-term growth drivers for each business ensure that they can expand for many years to come, even if a weakening economy causes a temporary slowdown. Here's why data center equipment maker Vertiv (VRT 5.70%) and building products company Johnson Controls (JCI -0.77%) are great stocks to buy now.

Vertiv reassures the doubters

Having pushed through price increases as planned in 2022 but missing its free cash flow (FCF) guidance, investors were concerned that perhaps Vertiv had been overly aggressive in signing deals that would result in bad debts or canceled orders.

However, the recent first-quarter report contained three things that reassured investors. First, Vertiv exceeded its FCF forecast for the quarter. Second, management raised its full-year 2023 adjusted operating profit guidance from $750 million-$800 million to $775 million-$825 million. Third, Vertiv beat its estimate for improving working capital (cash tied up in running the business) in Q1. The company had projected a year-over-year improvement of $15 million, but it came in at $53 million. 

Granted, it's only one quarter, and orders were down 23% on a year-over-year basis. Still, this is likely due to lead times improving and order patterns normalizing. In other words, data center and communications customers rushed to order last year in anticipation of lengthy lead times before deliveries could be made due to the supply chain crisis. Now that the latter is easing and lead times are shorter, order patterns will normalize. 

Thinking longer-term, there's been no change in Vertiv's estimate of the end-market environment for any of its key markets. That's a viewpoint backed up by continued investment by colocation customers (led by data center demand, with artificial intelligence possibly fueling growth in the future). In addition, there's no shortage of need in the cloud/hyperscale market as Alphabet and others continue building their networks. Alphabet's CFO, Ruth Porat, said on the recent earnings call, "We expect the pace of investment in both data center construction and servers to step up in the second quarter and continue to increase throughout the year."

Data center.

Image source: Getty Images.

Vertiv's full-year sales guidance calls for 15% growth. While there's a question mark over the near-term cadence of orders, the long-term outlook for spending remains positive. In addition, Vertiv is demonstrating an ability to increase pricing to offset rising costs while generating cash flow. 

Despite its recent strong run, the stock remains an excellent value, trading for 16.4 times the midpoint of management's full-year FCF guidance. 

Johnson Controls helps companies meet their net-zero requirements

Like Vertiv, Johnson Controls also raised its full-year earnings guidance during its recent fiscal second-quarter 2023 earnings call. Management expects full-year organic revenue will increase around 10%, a figure at the midpoint of the previous projection for low-single-digit to low-double-digit growth. 

However, it lifted the low end of its full-year earnings forecast to $3.50-$3.60 per share from the previous guidance of $3.30-$3.60 per share. Plus, there are some signs that one of the company's core growth drivers (adoption of digital technology) is being taken up by its customers.

As a reminder, Johnson Controls sells heating, ventilation, and air-conditioning (HVAC) systems; building controls; fire and security systems; and industrial refrigeration products via its global products segment. Meanwhile, the larger building solutions segment (around 63% of sales in 2022) designs, sells, installs, and services software and equipment in the same end markets. 

You could think of global products as being more of a short-cycle business, meaning there is a relatively shorter time between orders and delivery. So you will see a slowdown in its end markets in this segment first. 

Meanwhile, building solutions is more related to servicing and retrofitting equipment into Johnson Controls's installed base. 

Management sees the company's long-term earnings drivers coming from:

  • Helping building owners meet their net-zero carbon emissions goals by offering more efficient HVAC and control solutions.
  • Long-term services orders sold into the installed base, including upgrading existing customers to the company's digitally connected solutions.
  • Using the data from digitally connected devices to improve its service offerings, including better predicting when parts need replacing.

There was good news on all these fronts in its recent results. 

  • Global products' organic sales growth was up 12% year over year in the quarter, indicating ongoing short-cycle strength and the ability to offset a high-teens decline in demand from the North American residential market. 
  • Trailing-12-month orders for decarbonization solutions rose 11% to $1 billion.
  • Building solutions orders grew 8% organically year over year (compared to 5% organically year over year in the previous quarter), with service orders up a whopping 14%.

The strength in building solutions orders is backed by what CEO George Oliver described as "transforming the company with digital, going back and making sure that all of our installed base is connected." He noted, "Our parts business is up well over 20% year on year as a result of the work we're doing."

Connected buildings.

Image source: Getty Images.

While there's obvious concern about a slowing economy negatively impacting commercial HVAC demand this year, Johnson Controls' long-term catalysts remain robust. There's hard evidence to suggest its decarbonization and digital solutions are gathering strength. Trading for 20 times FCF expectations for 2023, the stock remains attractively priced for investors.