Johnson Controls (NYSE:JCI) reported a good start to its fiscal year as far as overall financial results are concerned. The company is involved in manufacturing batteries and car interiors along with ventilation, heating and cooling systems for constructions. According to the Q1 fiscal 2014 earnings release the company reported a 31% rise in net profit mainly driven by sales growth in China. In absolute terms the company's net profit was 69 cents per share in Q1 fiscal year 2014 reflecting a rise from 52 cents per share as reported during Q1 fiscal year 2013. A 5% increase in revenue to $10.91 billion was also recorded compared to analysts' expectations of $10.73 billion.
However, the company's share price was down 4% after the results were released. The reason behind this was that investors were expecting more from the company, especially from the company's batteries business. Investors were looking for more growth during the harsh winters that hit the US this fall. The growth in sales of cold-induced batteries was evident in the US but the warmer weather in Europe prevented the product from showing attractive growth as a whole. Therefore I will explore further whether or not this underperformance of the company's battery business will continue into the future or if the company will recover.
Few analysts regarded the fall as a point of entry for potential investors as they are optimistic about the company's growth prospects. Hence, my article will also discover what has allowed the company to outperform in the recently reported quarter and if this growth is sustainable. So, on the basis of ascertaining sustainability I will conclude whether or not the drop in share price is a good entry point for buyers to take part in the company's future growth and earnings.
To start, I will discuss the growth drivers for the company that allowed it to achieve its current results. I will also identify the weak performing areas of the company.
Strong Vs. Weak Drivers
The company operates through its three operating segments: building efficiency, automotive experience and power solutions. Statistics regarding the revenue performance of these segments are shown in the table below.
From the chart above you can see that the automotive experience segment generated more than 50% of the company's total revenue. Both the automotive and power solutions segments are increasing their contribution to the company's revenue. Building efficiency contributed 35.1% to the company's total revenue in 2012 but the proportion declined to 30.9% as reported in Q1 2014. So, my main focus will be upon the future outlook of the automotive experience and building efficiency segments of the company.
In terms of revenue growth, the automotive experience was once again the leader logging 11.5% growth compared to the previous year. On the other hand, building efficiency recorded a 2.9% decline in its revenue in 1Q2014 compared to 1Q2013. I have prepared the following two tables to show the details of the weak performing areas within the segments.
The table above shows that the global workplace solutions has been the major contributor to the company's revenue for the past two years and has recorded a 5% decline in its revenue growth in 1Q2014 compared to results from 1Q2012. The segment's revenue from Asia improved due to growth in construction activities in China and India. Since the North American economy is on its way to recovery the company only recorded a flat revenue growth from the area.
With regards to the most crucial segment, the following table showcases where major growth was derived.
During Q1 of fiscal year 2014, all of the areas within the segment performed well while seating contributed around 75% to the segment's overall revenue in fiscal years 2012 and 2013. I will discuss the reasons behind the growth in this segment under the heading of sustainability below.
For now let us have a brief look at the income generated by these segments.
From the table above you can see that the income from building efficiency has declined by 15.1% in the recently reported quarter compared to results from the corresponding quarter of the previous year. On the other hand, the automotive experience segment recorded an impressive 3 digit growth of 129.7% compared to Q1 2012. Power solutions registered a growth of 11.6% in its net income but has been regarded as a weak performer by investors as stated in the opening paragraphs of my article. The company has been taking cost-saving initiatives and strategic moves in order to improve its bottom-line performance.
So, by now we have garnered enough information regarding the drivers of the company's current performance improvement as well as its weak areas. Sustainability of growth from strong areas along with recovery in weak areas will determine the outlook for the company's future performance and position.
Global Car and Truck Production
The outlook of this industry is relevant to the company's automotive experience segment as well as its power solutions segment. In the most-recently reported quarter the company recorded a 12% increase in sales of batteries that auto manufacturers put in new cars on the assembly line.
Global production of cars and commercial vehicles rose by 5.1% in 2012 compared to the previous year. China's auto manufacturing industry recorded a growth of 23.7% in its gross profit from January 2013 to November 2013. The industry logged a 17.8% rise in its core business revenue on a year-on-year basis from January 2013 to November 2013. China is the world's largest manufacturer of cars and has been a major revenue driver for Johnson Control's revenue from this industry over the past year. One out of every four cars produced in the world comes from China.
The UK also contributed to the growth of this sector on a global basis as well as to Johnson Controls as new car sales in the country rose by around 10.5% in 2013. This was the highest absolute figure of sales since 2007. The economic recovery is boosting consumer income so private car buyers in the UK drove the 15% surge in new car sales. Economic recovery is still forecasted to bring in growth for the industry in 2014.
Overall, the global automotive industry is forecasted to grow at a rate of 5.5% from 2010 to 2015 finally reaching a net worth of $5.1 trillion in 2015. Therefore sustainability in the company's growth in this industry in the coming years is evident. The company's battery business will also grow due to the growth in the industry and investors have underestimated the company's future growth prospects from this business.
The surge in activities in the construction industry is likely to bring recovery and growth for the company's building efficiency segment.
Construction activities are regarded as a sign of economic activity around the globe. The global economies are predicted to recover from the recession in the coming years so the construction industry will receive a boost as new projects begin. The improvement in the industry can be seen as beneficial to the company as it has recorded a 5% increase in the commercial backlog of orders for this segment in the most-recently reported quarter.
According to MarketLine, the global construction and engineering industry is forecasted to record a handsome growth of 30% from 2010-2015 and will reach a net worth of $3 trillion by 2015. By 2025, the industry is projected to reach a net worth of $15 trillion. China and India will be the drivers of global growth in construction activities. The volume of construction is forecasted to grow by 70% over the next 12 years. China, the world's second largest economy, represented 18% of the overall global construction in 2012 and the construction market in the country is expected to increase by 8.5% in 2014. The overall output from China, India and the United States, the top three global building markets, was worth US$8.7 trillion in 2012 and will grow to US$15 trillion by 2025.
The Year Ahead and My Take
JCI forecasts its fiscal Q2 earnings to be 64 to 66 cents per share while Thomson Reuters' I/B/E/S poll of analysts indicates a potential 67 cents/share. According to my analysis, weak areas as identified by investors that triggered a sell-off after the earnings release will recover in the near future. As a result the company will not only register recovery in the feeble areas but will also see improvements in its stronger areas. The company's future outlook seems bright as per current industry forecasts and investors can jump in to take their share from the company's upcoming growth.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: The article has been written by a Blackstone Equity Research research analyst. Blackstone Equity Research is not receiving compensation for it (other than from Seeking Alpha). Blackstone Equity Research has no business relationship with any company whose stock is mentioned in this article