How did fourth-quarter results and orders perform?

  • Johnson Controls reported fiscal 2026 fourth-quarter revenue of 7.113 billion dollars, up 10.4% year over year and 1.3% above the Visible Alpha consensus. Adjusted earnings per share were 1.66 dollars, up 31.7% year over year and 4.9% above consensus. Bernstein noted, however, that some buy-side investors had expected larger revenue and earnings-per-share beats.
  • Orders rose 44% year over year in the same period, driven mainly by demand from critical facilities such as data centers and battery and semiconductor manufacturing plants. Backlog grew 43% year over year to a record 23 billion dollars; orders and backlog in the Americas both grew more than 50%, strengthening Bernstein’s confidence in subsequent growth.
  • Increased output of high-gross-margin chillers improved the quarterly product mix. However, although price increases exceeded cost inflation in fiscal 2026, the additional price revenue did not maintain the existing gross margin level, slightly diluting the full-year gross margin.

How quickly can backlog convert to revenue?

  • The company expects 70%–80% of its 23 billion-dollar backlog to convert to revenue over the next 12 months. Its fiscal 2027 guidance calls for organic revenue growth of 11%–12% and adjusted earnings per share of 6.15–6.30 dollars; first-quarter organic growth guidance is 12%–14%.
  • Conversion timing is mainly constrained by power and electrical infrastructure on the customer side, which in turn affects project progress and delivery acceptance. Management believes that if these constraints ease, order conversion could accelerate and revenue could exceed current guidance.
  • Bernstein believes strong growth in Americas orders and backlog supports quarterly increases to the company’s guidance, ultimately bringing full-year organic growth into the range above 10%; this is the firm’s assessment of potential upside to guidance.

What opportunities do capacity expansion and product changes bring?

  • The company expects capital expenditure of approximately 900 million dollars in fiscal 2027, mainly for capacity expansion but also for digital and AI investments to shorten lead times and improve field-work efficiency. Management expects adjusted free cash flow conversion of approximately 95%, down from 103% in fiscal 2026.
  • Bernstein previously worried that new chiller capacity would come online in a concentrated wave. It now believes orders and backlog indicate more demand is available to absorb the additional supply, although it also notes that supply could ultimately expand too far.
  • Chillers remain the largest part of the company’s product portfolio, while coolant distribution units (CDUs), cold plates and modular data centers are contributing more growth. The company is expanding CDU capacity in three regions, and management says most of it has already been reserved by customers.

Why were earnings forecasts lowered despite the positive growth outlook?

  • The company’s fiscal 2027 guidance implies operating leverage above 30%, below Bernstein’s previous expectation of nearly 40%. The firm believes the main reason is that 400 million dollars in transformation costs will be split roughly evenly between fiscal 2027 and 2028; the company targets approximately 600 million dollars in annual gross savings by fiscal 2029.
  • Bernstein expects some near-term savings to be reinvested in the business, so margins will not benefit materially over the next two years. The firm lowered its adjusted earnings-per-share forecast for fiscal 2027 from 6.35 dollars to 6.30 dollars, and for fiscal 2028 from 7.65 dollars to 7.23 dollars.
  • Despite lowering its earnings forecasts, Bernstein maintained its outperform rating and raised its price target from 190 dollars to 194 dollars as it rolled its valuation model forward by a quarter.