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I thought it might be time to look at companies in the industrial sector because at this point in the economic recovery cycle they should begin to do well. I say this despite the fact that General Electric (GE) stock got pummeled last week after the company released results that were less than stellar, at least from the market's point of view.

In fact, GE was down 5% on October 15 after the results came out and has now pulled back more than 18% from its high of the year. The only good news is that the stock is still up 23.1% from my original recommended price of $13.04. Despite the negative reaction from analysts, I still like GE so I would view this pullback as an opportunity to buy in or add to existing positions. See my updates for more.

An industrial business I like even more is Johnson Controls Inc. (JCI). The company is based in Milwaukee, Wisconsin and has 1,300 locations worldwide which generated global sales of more than $28 billion in 2009 (figures in U.S. dollars).

I always like looking at stocks with good financial fundamentals that have been beaten up in the marketplace for reasons that are generally beyond the company's control. This is the case with Johnson Controls. Its main operating units are in the construction and automotive sectors so it should come as no surprises that they have been struggling for the past couple of years. The reality is that those two areas have been particularly brutal places to do business and only now are the sectors beginning to heal and grow again.

The third segment in which JCI operates is something they call "power solutions", which is essentially the battery business. Here again we have a strong automotive component. Although JCI does make batteries for solar systems as well, most of their products are still the old-fashioned lead-based car batteries that we been using for years. Of course, they are found in all manner of movable objects from golf carts to jet skis but the largest part of the businesses is in automotive.

Recently, JCI has made a push into batteries for hybrid electric vehicles and the company has added production capacity in China and the U.S. to meet the expected increase in demand for these higher purpose batteries. It remains to be seen how significant the uptick in consumer interest will be if oil stays relatively inexpensive and government subsidies are reduced or eliminated, but in the short term it seems likely that this area will open up some new revenue opportunities for the company.

Earlier this month, JCI announced a strategic partnership with Hitachi to share battery research and development costs which should help spread the considerable expense involved in producing more efficient and longer lasting battery technologies.

JCI has retooled a factory in Michigan with the help of grants from the federal and state governments, which at least adds to the small list of companies that build batteries in the U.S. In my view, whether or not you think electric cars are good idea it is unwise to leave all the research, development, and production of these evolving technologies to China and other forward-thinking nations. Johnson Controls has a long history of lead battery production so hopefully they will be able to apply some of that knowledge to the newer lithium ion technology which is certain to replace lead batteries over time.

The company is also a leader in HVAC (heating, ventilating and air conditioning) control products. JCI makes thermostats, sensors, and related products for commercial and industrial requirements. The company is already among the leaders in the green building movement, which continues to grow, and has benefited from a push towards energy efficiency and retrofitting older buildings. This is an area that will certainly continue to improve when construction begins to ramp up again for multi-family and single-family dwellings. Although we have not seen any improvement in the U.S. building sector yet, we should begin to see growth in 2011.

The company also has smart grid applications and new lighting technologies which play into the ongoing concerns about global warming and diminishing fossil fuel resources. As well, JCI offers solar and geothermal solutions which should be attractive going forward.

The company has a nice revenue balance, particularly in their global services business. Overall, JCI is looking for steady sales growth next year with margin improvement in the automotive segment. In the power solutions segment, they're forecasting sales growth of between 11% and 15% with higher volumes across all the regions and they are expecting segment margin improvement here as well. In the building and construction segment, they see sales up between 8% and 10%, again with growth in segment margins which they will allow them to continue to pay dividends and ultimately fully fund their pension obligations. In fact, Johnson Controls may raise their dividend in November at their next board meeting.

Recently, the company published a strategic review and gave a 2011 outlook coincident with celebrating their 125th anniversary. Some highlights from that report focused on their growth from $1.8 billion in revenue in 1985 to a projected $33.5 billion in 2010. The company also noted that more than 60% of their employees now work outside North America and they made a commitment to continuing to develop production facilities in China.

JCI has experienced double-digit growth in their energy solutions for building efficiency and predicted continued recovery in the automotive segment. Their sales backlog in automotive improved from $2.5 billion to $4 billion. The company is doing business with Ford, General Motors, Nissan, Kia, and China-based Chery. This year they added work from Volkswagen Honda, Toyota, and Renault.

It all adds up to expected revenue growth of 9% with an earnings per share outlook of $2.30 to $2.45.

The company is been growing through M&A activity as well. Recently they announced the acquisition of textiles and integrated trim manufacturer Michel Thierry as well as two smaller tuck-in acquisitions that expand their interior technologies.

I see JCI as a company with steady growth potential. It is in great financial shape with operating segments that will be recovering significantly over the next couple of years. The company was recently upgraded to a buy by Needham and Company with a price target of $40. Currently, the stock is trading at $34.18, which is still below its 52-week high of $35.77.

Action now: Buy with a target of $42.

Disclosure: Author is long JCI, GE

Source: Johnson Controls Has Room to Run