Johnson Controls: Earnings Preview

| About: Johnson Controls, (JCI)

Johnson Controls Inc. (NYSE:JCI) is scheduled to release its third quarter 2011 results before the market opens on July 20, 2011.

The Wisconsin-based company earned 56 cents per share in the first quarter, beating the Zacks Consensus Estimate by a penny.

For the upcoming quarter, the Zacks Consensus Estimate for Johnson Controls is pegged at a profit of 53 cents per share, which reflects an annualized decline of 1.15%. The upside potential of the estimate, essentially a proxy for future earnings surprises, is 13.21%.

With respect to earnings surprises, the company has put together an average surprise of 1.78% over the past 4 quarters, with a negative surprise being recorded in one of the quarters involved.

Second Quarter Recap

Net sales in the second quarter grew 22% to $10.14 billion, which was higher than the Zacks Consensus Estimate of $9.25 billion.

Revenues in the Automotive Experience segment went up 25% to $5.22 billion, driven by higher production volumes and automotive seating and interior program launches. Segment revenues in North America rose 22%, Europe increased 26% and Asia surged 37%, including a 31% rise in China.

The segment reported an income of $247 million, a 31% increase from $189 million in the corresponding quarter of the previous year, driven by higher volumes and improved operational efficiencies.

Revenues in the Building Efficiency segment escalated 18% to $3.52 billion, led by a 31% rise in sales in Asia and a 27% increase in sales in Global Workplace Solutions. The segment recorded a 27% rise in income to $132 million from $104 million, driven by higher volumes.

Revenues in the Power Solutions segment appreciated 19% to $1.41 billion, reflecting higher shipments of both aftermarket and original equipment batteries. Aftermarket sales increased 17% in the Americas while original equipment (OE) and aftermarket unit sales in Asia jumped 163% due to higher volumes associated with the consolidation of a Korean joint venture, market share gains and incremental production from the company's second manufacturing plant in China.

The segment income soared 33% to $178 million from $134 million in the second quarter of fiscal 2010 as a result of higher volumes and strong operational performance.

The company had cash and cash equivalents of $401 million as of March 31, 2011, compared with $770 million in the year-ago period. Total debt amounted to $4.54 billion as of the above date compared with $3.38 billion a year ago.

Estimate Revisions Trend

The Zacks Consensus Estimate for the third quarter of 2011 is currently pegged at a profit of 53 cents per share. Analysts are slightly cautious on the stock considering the constant pricing pressure from the OEMs along with the intensifying competition in the industry.

Agreement of Estimate Revisions

Out of the 21 analysts covering the stock for the third quarter of 2011, one has upgraded the stock in the past 30 days. None have downgraded.

Magnitude of Estimate Revisions

Following the second quarter earnings release in April, the third quarter earnings per share were projected at a profit of 67 cents. However, in the last 60 days, the estimate dropped by a substantial amount and stands at a profit of 53 cents per share.

Our Take

Johnson Controls expects to benefit in the long-run from its focus on China. In the seating business, Johnson Controls has acquired more than 50% of the country’s market share. The company has started to invest $500 million in four automotive battery plants in and around Shanghai to meet excess demand in the country. The plants will have an annual production capacity of 30 million batteries by 2015.

The company also anticipates revenues to increase 15% to $39.5 billion in fiscal 2011, up from the previous forecast of $38.5 billion. The increased guidance was driven by growth expectations for Building Efficiency and a stronger Euro.

Moreover, its battery business is set to grow from new hybrid wins, and the company is adding capacity to meet demand. The acquisition of the Delphi global battery business provides Johnson Controls with a stronger foothold.

However, the mounting pressure from OEMs to reduce prices combined with the volatility in commodity prices may affect the company’s profitability in the near term. Moreover, increasing debt and decreasing cash are also among the growing concerns

Strong competition from major domestic and international manufacturers and distributors of lead-acid batteries, including Magna International, Inc. (NYSE:MGA) and TRW Automotive Holdings Corp. (NYSE:TRW) is not helping matters.

Keeping these factors in mind, shares of Johnson Controls are maintaining a Zacks #3 Rank, which translates into a short-term Hold rating. In addition, shares also have a Neutral recommendation for the long term.