Johnson Controls Is A Good Long-Term Investment Candidate

Aug.31.14 | About: Johnson Controls, (JCI)

Summary

Johnson Controls is a global technology and industry conglomerate that has operations in 150 countries. Its strong and growing presence in emerging markets is expected to give it sustained growth.

Johnson Controls is going to form the world’s largest automotive interior business through a joint venture with a Chinese car manufacturer.

The urbanization and increased usage of energy efficient batteries trends are expected to give Johnson Controls sustained growth. Its valuation presents an attractive upside.

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Source: Yahoo Finance

Johnson Controls (NYSE:JCI) is a global technology and industrial conglomerate. It has a far-reaching global presence and serves customers in over 150 countries on six continents. Its presence in developing markets is a big source of strength since emerging markets are expected to provide healthy growth opportunities. JCI's stock has produced a 16.27% price return in one year as shown in the figure above.

JCI Owns a Portfolio of Strong Global Businesses

Johnson Controls deals in diverse areas like automotive seating, automotive interior, lead-acid batteries, lithium-ion batteries, battery recycling, building efficiency, heating, ventilation and air-conditioning (HVAC), building technology, integrated facilities management and industry solutions. JCI's research and development capabilities allow it to remain at the top of the categories it deals in. JCI is the world's largest producer of acid-lead automotive batteries producing over 135 million batteries annually. JCI's business segments and their relative sizes based on revenue (FY 2013) are given in the figure below.

Johnson Controls is going to form the world's largest producer of automotive interiors through a joint venture with a Chinese manufacturer. It is already operating 56 plants in 25 locations in China.

The Joint Venture with a Chinese Car Manufacturer is another Step towards Growth

JCI's joint venture with SAIC, the Chinese state-owned car manufacturer, is a good step that will help JCI to grow its top and bottom lines in the future. This joint venture will create the world's largest automotive interior producer that would hold approximately 15% of the global market share. This joint venture is expected to start in 2015 and it is expected to generate an estimated $7.5 billion in annual revenue. JCI has a 30% stake in this joint venture. China is a blooming auto market that is expected to show healthy growth in the coming years and JCI is determined to capitalize on this growth.

JCI's seat manufacturing segment has a strong presence with a leading market share in China through its non-consolidated joint ventures. JCI is operating about 56 plants in 25 locations in China. With a strong backlog, demand is growing at double the rate compared to demand for domestic products.

Capitalizing on the Growth in the Construction Industries of Emerging Markets

The world's urban population is expected to grow at a rapid pace in the coming years and this will create great demand for products and services related to building and construction. JCI provides the innovative products and services for construction and real estate developers so the company is expected to capitalize on this growth. The world's urban population was about 1.4 billion in 2011 and is expected to grow to 5 billion by 2030. About 90% of this growth is expected to come from the emerging markets. Between 2011 and 2030 about 20% of the newly urbanized population will be Chinese and about 16% of the newly urbanized population will be Indian. Therefore it is critical that JCI enhances its presence in these emerging markets to secure growth. JCI is already working on expansion in emerging markets through investments and joint ventures in emerging economies. JCI's presence in emerging markets including China and India is expected to provide healthy growth for the top and bottom lines.

JCI has expertise in making buildings more comfortable, productive, and safe and is using this expertise in 125 countries. Trends such as high energy costs, energy shortage and the move towards energy-efficient buildings and construction are expected to give JCI growth in the coming years.

Capitalizing on the Growth in Fuel-Efficient Absorbed Glass-Mat Batteries

Growth in the demand for fuel-saving batteries is expected to remain high in the coming years. Absorbed glass-mat (NYSE:AGM) batteries use start-stop technology in cars. The start-stop feature allows engines to sleep automatically when car is idle. This decreases fuel costs by about 3-8%. It is estimated that about 40% of new car batteries worldwide will be start-stop batteries by 2018.JCI is the leading manufacturer of advanced batteries and this leading position is expected to help the company to expand its market share. JCI supplies AGM batteries to major auto manufacturers in Europe. JCI's batteries are now used in Ford's (NYSE:F) 2013 start-stop vehicles and the Chevy Malibu start-stop vehicles.

A Shareholder-Friendly Company

JCI shares its success with its shareholders. It is interesting to know that JCI has paid dividends consistently since 1887and this is evidence of the company's commitment to dividend payments. The company has increased the dividend by 16%. JCI has also initiated a share repurchase plan worth $3 billion. JCI was recognized as a shareholder-friendly company by Institutional Investor Magazine. Investors that like to receive regular dividends should consider investing in JCI.

Target Price Reveals Attractive Upside

The consensus target price reveals that JCI is underappreciated by the market at its current price of $48.45. The mean target price estimate is $56.44 and presents an upside of 16.5% at the current price. The median target price is $58 that presents an upside of 20%. The most optimistic analyst estimate is $65 if materialized and presents an upside of 34% at the current price. The most conservative analyst estimate is $42 with a downside of -13% at the current price level. Therefore an analysis of the target price polled by Thomson/First Call from 18 brokers reveals an attractive upside at the current price.

Source: Yahoo Finance

Multiples Based Valuation

The price to earnings ratio is 16.59 times its current price and shows that JCI's stock is undervalued compared to the industry and sector but overvalued compared to the P/E average for the comparison category of the S&P 500. Building growth to the P/E analysis, the PEG ratio shows that JCI's stock is undervalued compared to the industry but overvalued compared to the sector and S&P500. On a whole, the analysis of the P/E and PEG ratio gives some indication of the relative price undervaluation.

Source: Yahoo Finance

Conclusion

JCI has a strong global presence with operations in over 150 countries. Its presence in the emerging markets is expected to give it sustained growth. Strong demand for JCI's building and construction related products in emerging markets are going to drive the company's top and bottom lines. JCI is going to form a joint venture with a Chinese company to create the world's largest automotive interior business. JCI's presence in the Chinese auto market will give JCI healthy growth in the future. Its target price estimate presents an attractive upside.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.