Johnson Controls (NYSE:JCI) is currently undertaking a review of its portfolio of businesses. A possible divestment or spin-off of all or part of its Automotive business should release value at the current price. Further action on margins and growth elsewhere should release even more upside in the coming years.
Johnson Controls appointed a new CEO, Alex Molinaroli, in July. This change in management seems to have triggered a change in focus. Assisted by external consultants, the company is undertaking a thorough review of its portfolio of businesses with a particular focus on opportunities with Automotive.
On the most recent conference call management emphasized that it would be possible, in theory, to separate out the Seating and Interior businesses. Previous decisions in the space were motivated by the belief that customers were seeking to source complete interiors from one supplier. Customers appear to have moved in the opposite direction so management is looking at options for these businesses.
The Electronics business within Automotive is already up for sale. The HomeLink portion was sold earlier this year, an announcement on the remainder is expected soon. Total proceeds are expected to be, at least, $900m.
Management is actively looking for a buyer for Interiors, as announced on the Q4 conference call. This business is more troubled operating at low margins and needing more capital for further restructuring within a highly competitive industry. It is unlikely that this division will yield anything in a sale. Management appear to have choices
Given management's recent comments it seems likely Seating is also being scrutinized. In 2011, Johnson made a series of upstream acquisitions (metals and other seating components) in this category to counter pricing pressure from OEMs. Problems at other manufacturers, Lear and Faurecia, also saw the business winning a lot of new businesses. Problems have appeared in the legacy metal plants in Europe which has depressed margins. Management clearly remains confident in turning this around setting margin guidance for Seating at 7-8% in 2017, from ~4.5% in 2013. The potential for growth is strong with the Chinese seating business registering 20% annual rates.
The opportunity in Seating is not, therefore, about divesting a business with poor potential but benefiting from re-rating as lower margin and slower growth businesses are separated from higher margin and faster growth ones. As a result, a spin-off would be more likely than a sale.
The Building Efficiency division manufactures and distributes control systems and compressors for commercial and residential properties. These are mostly applied in HVAC (heating, ventilation and air-conditioning) systems. The Global Workplace Solutions segment offers facilities management services related to reducing costs and improving the performance of commercial properties.
Within this division, there are some further opportunities to add value. The intention with Global Workplace Solutions was to generate some demand for HVAC products but these synergies have not transpired. The business is now being run separately but it isn't clear why it wouldn't be more valuable as part of a focused facilities manager, especially as it is dragging down the faster growth of other businesses in Business Efficiency. Equally, the Residential HVAC business lacks distribution scale but a divestment here is unlikely given residential construction trends.
These construction trends mean that the near-term growth outlook for this division are fairly good. Margins are improving in the North American service business too and growth should continue to be strong in Asia. However, commercial construction has clearly been weak. Recent declines in the backlog to levels below 2010 should lead investors to question management's mid-term guidance of 8-10% revenue growth.
The Power Solutions division produces lead-acid automotive batteries for the OEM and replacement market. The company has developed offerings in lithium-ion and various additional technologies aimed at "Start-Stop vehicles" as well as recycling operations for its lead batteries.
Performance in Power Solutions has surprised this year. Margins have been driven higher by improved pricing, scale in recycling, growth in absorbent glass mat batteries (they are twice as profitable as lead), and growth in China. Increasing adoption of Start-Stop batteries should boost growth in AGM batteries further. The mid-term growth target of 10-15% looks more achievable here.
The opportunities for 'self help' through corporate restructuring are strong at Johnson Controls. Selling off the worst performing divisions and spinning off the slow growth, low margin divisions should lead to re-rating in line other multi-industry names as the high quality of the Business Efficiency and Power Solutions divisions is brought into focus. The current $3.8bn buyback program could also be extended if realizations from any divestments are favourable.
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