- Johnson Controls’ business is focused on the auto industry and building markets
- Its current value is driven by (1) rising global automobile demand, (2) growing building markets, and (3) increasing outsourcing of commercial facility maintenance
- While we are optimistic on its outlook, the euro zone crisis adds headwinds to its growth
Johnson Controls (NYSE:JCI) is a diversified industrial company that serves global building markets with heating, ventilation and air-conditioning (HVAC) products and facility management services. The company is also one of the largest suppliers of automotive interiors and batteries to the automobile industry. We believe that the rising global automobile demand and growing building markets in Asia are the primary drivers of its value. Partially mitigating this growth is the weakness in the European building and automobile markets, which could drag on growth.
We currently have a stock price estimate of $33.72 for Johnson Controls, approximately 5% above its current market price.
Factors that drive the company’s current value:
1) Rising global automobile demand: Vehicle manufacturers have been raising their production rates since the financial crisis of 2008-09 due to the growing global demand for automobiles. In 2012, more than 60 million cars were produced globally, up from 59.8 million in 2011 and 58.3 million in 2010.   Going forward, we anticipate production volumes to rise even further driven by low car ownership rates in major emerging economies like China and India. These higher production volumes will in turn raise demand for automotive batteries and interiors manufactured by Johnson Controls.
Currently, the company is the world’s largest manufacturer of lead-acid automotive batteries with an annual production output of 135 million lead-acid batteries.  Johnson Controls is also increasing its production capacity of advanced battery types like Absorbent Glass Mat (NYSE:AGM) that power start-stop vehicles and Li-ion that power hybrid and electric vehicles. In all, the company is raising its annual production capacity for advanced batteries to 19 million by 2015.  With this, it aims to address the growing demand for start-stop and hybrid vehicles in several markets, especially Europe.
Johnson Controls competes with other major automotive battery manufacturers like Exide, GS Yuasa, East Penn and Fiamm in this space. Overall, automotive batteries as a segment constitutes around 30% of Johnson Controls’ value according to our analysis.
The company also serves the automobile industry with interior systems that include seating, electronics, instrument and front panels, floor consoles and door systems. It counts most of the world’s leading automobile manufacturers among its clients. In January 2013, Johnson Controls unveiled a new range of luxury interior systems to address the growing demand for luxury vehicles, particularly in China. As part of these luxury systems, the company showcased its new Inspiration seating which converts a typical three-seat second-row seating in a car to two lounge seats. These new seats offer premium features like heating and ventilation, massaging, four-way lumber support and can be controlled through the iPad.
The company competes with other major automotive interior suppliers such as Lear, Faurecia SA and Magna International in this sector. The automotive interior segment constitutes just over 25% of Johnson Control’s value according to our estimates.
2) Growing building markets in Asia: Johnson Controls also serves building markets globally by installing HVAC systems in commercial and residential properties and undertakes long-term service contracts of the same. The upgrade or replacement of these systems in existing buildings provide the company with repeat business while the installation of these systems in new housing or commercial starts provide growth. In terms of its revenue split, Johnson Controls generates approximately 70% of its total HVAC system revenues from existing buildings and the remaining from new commercial constructions. 
Currently, the growth in new commercial constructions in Asia and recovering housing starts in North America are driving growth in HVAC segment sales of the company. Looking ahead, we anticipate this trend to continue driven by rising construction spending in Asia, primarily China.
Johnson Controls competes with several global players like Honeywell (NYSE:HON), Siemens Building (SI), Schneider Electric (OTCPK:SBGSF), Carrier, Trane, Daikin (OTC:DKILF), Lennox (NYSE:LII), Goodman Global and Jones Lang LaSalle (NYSE:JLL), regional and local players in this space. HVAC system and servicing constitute nearly 40% of the total company value, according to our analysis.
3) Increasing outsourcing of facility management: Another factor that is adding value to Johnson Controls is the rising trend among large corporates and government bodies to outsource their office maintenance to third parties so that they are able to better focus on their core functions.
Johnson Controls addresses this market by performing tasks related to comfort and reliability of office buildings. Under its facilities management portfolio, the company manages subcontractors for cleanliness, maintenance and landscaping. It also provides energy management services which gives it a competitive advantage as clients are able to recover a significant portion of their contract expenditure through energy savings.
The global market for facilities management is a highly fragmented one in which Johnson Controls competes with several small regional players. According to our analysis, this business segment called Global Workplace Solutions constitutes around 7% of the company’s total value.
Mitigating these above mentioned drivers are macroeconomic issues in Europe, which is impacting demand for cars and spending on new commercial constructions on the continent. This is negatively impacting sales in all segments of Johnson Controls. If the European crisis worsens, it could result in downside to our current valuation of the company.
- Worldwide car production in 2012, February 21 2013, www.worldometers.info
- Automobile production statistics by OICA, February 21 2013, www.oica.net
- Fiscal year 2012′s 10-K, November 19 2012, www.johnsoncontrols.com
- Absorbent Glass Mat (AGM), February 21 2013, www.johnsoncontrols.com
Disclosure: No Positions