Johnson Controls Reports Solid Q1 Results; We See Margin Expansion Ahead; Raise FVE to $70

In our view, Johnson Controls reported solid fiscal first-quarter results that featured 9% organic top-line growth (due to price increases), 140 basis points of adjusted operating margin expansion (to 10.6%), and a 24% increase in adjusted EPS (to $0.67). Nevertheless, Johnson Controls’ stock sold off on Feb. 1, perhaps due to a combination of below-consensus revenue (sales missed FactSet consensus by 3%) and free cash flow burn compared with the prior-year quarter (that is, a $430 million outflow compared with a $257 million inflow last year). Based on questions on the earnings call, there may be some skepticism that unfavorable sales mix (which was a headwind for first-quarter profitability) will abate.