Johnson Controls: Still Has A Positive Future

| About: Johnson Controls, (JCI)


Johnson Controls experienced strong growth in the last 10 years at a CAGR of 7.3% while its peers have grown by 5.8%.

The Chinese market contributed $7.2 billion in revenues out of the total ~$43 billion in 2013.

The company expects to reach $ 12.5 billion by 2018. The building efficiency and automotive segments and particularly the advanced battery segment are expected to see improvement.

The JCI/Hitachi HVAC joint venture will bring synergies to enlarge capacities and develop the distribution of HVAC technology products.

Forecasted revenue to go up by 3% in 2014 due to increased vehicle production in North America and China, structural changes and new automotive ventures.

Johnson Controls Inc. (NYSE:JCI) made $43 billion in revenues in FY2013 through its five market leading businesses: building efficiency and global workspace solutions, automotive seating, automated interiors, and power solutions.

JCI Rewarding its Shareholders

JCI has adequately rewarded its shareholders over the last 10 years and continues to do so by offering the best optimization services to clients. A comparison with its peers including UTC, Danaher (NYSE:DHR), Emerson (NYSE:EMR), Eaton (ETC), Ingersoll-Rand (NYSE:IR), 3M (NYSE:MMM), Honeywell (NYSE:HON) and ITW (NYSE:ITW) also reflects JCI's strong performance and high returns to stakeholders. Revenue has grown by a CAGR of 7.3% in the past 10 years while its peer group has exhibited a CAGR of 5.8%. Similarly the returns to shareholders were as high as 15.1% for JCI while its peers have returned 14.1% to their shareholders as illustrated in the figure below.

Source: Strategic Review and 2014 Outlook

China Continues to be a Strong Market for JCI

The Chinese market presents vast opportunities for the company. This region has contributed well in the past years and is expected to be a major contributor in the upcoming years. In 2013 a major chunk of revenues was contributed by the Chinese market, $7.2 billion, and this number is expected to rise to about $12.5 billion in 2018.

Source: Strategic Review and 2014 Outlook

Outlook for 2014

The automotive and commercial building markets in Europe have seen a slowdown that is expected to continue in the upcoming year. However building efficiency markets in other regions like North America have shown signs of improvement as we observe increasing orders Q-o-Q. The battery segment will also exhibit slow improvement in the near term.

JCI/Hitachi (OTC:HMTLF) HVAC Joint Venture to Bring Synergies

Both companies manufacture HVAC technologies for commercial and residential usage including the Variable Refrigerant Flow (VRF) that is exhibiting a remarkable demand growth. The joint venture would enhance the manufacturing capabilities of the two companies and also develop JCI's distribution channels and this will considerably grow sales.

Market Leader in Automotive Seating

Source: Strategic Review and 2014 Outlook

JCI provides the best in class automotive seating "completed product" as well as "seating components". The clear dominance of JCI is shown through the different segments' market shares in the figure above. It maintains a 28% market share in the complete seats segment and will continue to benefit as the market grows. Despite the slowdown in Europe, the progression in the Chinese and North American market will continue the growing trend in this segment.

Maintain a Balanced Capital Allocation to Increase Cash Flows

Source: Strategic Review and 2014 Outlook

The company intends to significantly increase its cash flows over the next three years. This will be driven by higher returns to shareholders, divesting JCI's less attractive ventures and mergers, and acquisition activity that will augment cash flows.

Source: Strategic Review and 2014 Outlook

The company has consistently increased its dividend over the years in line with its earnings growth. The more recent 16% increase in dividends to $0.22 per share from the previous $0.19 per share has further boosted the confidence of shareholders. The company has shown good commitment to its shareholders and promises high value for its stakeholders in the foreseeable future.

Share Repurchase Program

The company has recently announced that it will repurchase an additional $3 billion bringing the total to $3.65 billion. Repurchases of $1.2 billion have already been completed in Q1 2014 and another $2.4 billion is expected to be completed in 2015 and 2016. This will somewhat offset the dilution due to the previous divestures of the company and expected divestures in the coming period.

Expectations from Fiscal Year 2014

The revenue is expected to go up by 3% to $43.8 billion in FY2014 and will be instigated by higher vehicle production in North America and China. Increasing growth will be observed in all the segments within the emerging markets. Income is expected to rise by ~15% (EPS between ~$3.15-$3.30) due to cost savings and restructuring initiatives. Capital expenditure would be focused on new automotive ventures and capacity expansions in the emerging markets especially in advanced batteries within the power solutions segment. Automotive seating also presents alluring growth prospects for the company.

Building Efficiency Outlook for 2014

Sales are expected to rise by 1% - 3% due to the North American market's recovery and strong emerging market growth. Margins are expected to grow from 7% to 7.2% due to structural changes and improvement in the operating model. The company is on track to achieve its 2018 targets of organic sales growth of 5% - 6% and margins of 10%.

Automotive Outlook for 2014

Sales are expected to rise by 1% - 2% due to growth in the North American market and continued growth in the emerging market. Margins are expected to grow from 4% to 4.2% in this segment driven by higher margins in the seating segment from 4.8% to 5%, the interiors segment's margins will increase from 1% - 2% and the electronics segment's margins will increase from 5.9% - 6% due to operational enhancements. In the mid-term the company expects that the automotive seating segment would attain annual increases of 40 to 50 bps and reach a margin of 7% by 2018.

Power Solutions Outlook for 2014

Sales are expected to rise by 7% - 8% due to higher market share driven by higher production in AGM batteries. Volumes would grow in all regions, particularly in China. Margins are expected to grow from 16% to 16.2% due to synergies through economies of scale and operational improvements through vertical integration and manufacturing efficiencies. In the mid-term the company expects the sales to grow by 8% - 9% by 2018 due to increasing market shares and advanced battery technology. Margins are expected to rise by 100 to 150 bps due to an improvement in the company's product mix.

Electronics Divesture

The company plans to divest its electronics business in 2014. The interiors segment is a low margin segment and requires intensive capital investment. JCI currently earns $4.2 billion of revenues from its automotive interiors segment and is gradually shifting its focus away from this less lucrative segment.

JCI Still Has a Positive Future on Despite Slowdown in Europe

JCI will see continued growth driven by high potential in China and an increase in the sales of its automotive and building efficiency segments. The company will continue penetrating deeper into the emerging markets and enhance its market share especially in the advanced batteries segment.

Synergies for the joint venture with Hitachi is also proving to be beneficial and provides JCI them with a competitive edge over its peers. Although THE European market is expected to show slow progress in the near term the recovery of the North American and the Asian markets will drive JCI to higher profitability.

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.