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Earnings Results: Johnson Control stock leads S&P 500 losers as supply-chain troubles trump strong demand, leading to lowered outlook

Shares of Johnson Controls International PLC were having their worst day in 13 years, after the building products and HVAC company reported fiscal second-quarter revenue that missed expectations and slashed its full-year earnings outlook, as accelerating demand lost out to overseas troubles and supply-chain disruptions.

“Near-term uncertainties related to the lockdown in China and geographic instability, coupled with the impact of ongoing supply chain disruptions, warrant a more cautious outlook and a revision to our second-half expectations,” said Chief Financial Officer Olivier Leonetti.

The stock

sank 13.9% in afternoon trading, enough to pace the S&P 500 index’s

decliners. It was headed for the lowest close since Feb. 16, 2021, as well as the biggest one-day decline since it tumbled 14.2% on Nov. 11, 2008.

Net income for the quarter to March 31 dropped to $11 million, or 2 cents a share, from $343 million, or 48 cents a share, in the same period a year ago.

Excluding nonrecurring items, such as restructuring and impairment costs of $384 million and $11 million in charges associated with the suspension of Russia-based operations, adjusted earnings per share of 63 cents matched the FactSet consensus. Read the company’s statement on Ukraine.

Sales grew 9.0% to $6.10 billion, missing the FactSet consensus of $6.16 billion.

Among the company’s business segments, sales of Building Solutions North America rose 6.5% to $2.23 billion, helped by “strong growth” in its heating, ventilation and air conditioning (HVAC) and controls platform. Global products sales rose 16.0% to $2.29 billion, boosted by “strong pricing and broad-based demand” for commercial and residential HVAC and fire and security products.

Meanwhile, cost of sales increased 13.4% to $4.14 billion, outpacing sale growth, to knock gross margin down to 32.1% from 34.7%.

The most disappointing part of the report was the company’s outlook for the current quarter and full year.

“[W]hile the anticipated supply chain improvement is happening, it is happening at a slower pace,” said Chief Executive George Oliver on the post-earnings conference call with analysts, according to a FactSet transcript. He said the troubles are leading to “inadequate supply” of semiconductors and components or controls products.

“We expect a slower pace of improvement to continue throughout the second half, which is the primary contributor to our lower outlook for the year,” Oliver added.

The company expects third-quarter adjusted EPS of 82 cents to 87 cents, well below the FactSet consensus $1.02. It also cut its fiscal 2022 adjusted EPS guidance range to $2.95 to $3.05 from $3.22 to $3.32.

Baird analyst Timothy Wojs reiterated the neutral rating he’s had on the stock for at least the past three years following management’s downbeat outlook.

“While demand backdrop remains solid, guidance cut likely takes investors by surprise, and reduced margin outlook suggests that F2022/F2023 estimates will need to be calibrated lower,” Wojs wrote in a note to clients.

But it’s that solid demand that keeps Oliver optimistic about future growth, as supply chain challenges should continue to fade.

“Despite these challenges, we are confident the backlog is turning, driving higher revenue growth with more accretive margins as we think ahead to 2023,” Oliver said.

The stock has tumbled 34.4% year to date, while the SPDR Industrial Select Sector exchange-traded fund

has lost 8.9% and the S&P 500 has dropped 12.2%.

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