Johnson Controls, Inc. (JCI) recently announced results which
disappointed the market and the stock plunged about 8%. The company reported a profit of 61 cents per share (for the third quarter), which was below analyst estimates of 66 cents per share. It cited soft demand and a falling Euro as some of the reasons for the results and lowered guidance for the fourth quarter.
Many recent signs show that the global economy is trending lower. The European debt crisis remains unresolved, growth rates in China are lower, and numerous data points show that the United States could be heading towards a recession as it faces a looming "Fiscal Cliff" later this year. There are many issues that are clouding the visibility for investors, but one thing that can and must be looked at before investing, is the current strength of the balance sheet. Companies that have cash-rich balance sheets and little to no debt are positioned to ride out a potential recession and come out in much better shape than companies that carry high debt loads and relatively small cash levels. A balance sheet that might be adequately strong when the economy is growing or even just stable can suddenly look woefully inadequate if sales and profits start to drop and if the economy is in decline.
While Johnson Controls is a fine company with good quality products, the stock has not been so fine lately, and it could continue to drop. It does not have the kind of balance sheet strength that many investors want to see in the event of continued economic weakness: The balance sheet shows only about $256 million in cash, and $6.32 billion in debt. Furthermore, Johnson Controls is in a number of economically sensitive businesses which includes automotive, heating, air conditioning, etc., and this is another reason why the balance sheet could become an increasing concern for investors. While the current situation in terms of earnings, and balance sheet is not cause for major alarm, it does warrant caution and it could be enough to keep a lid on the stock at best, and at worst, cause the stock to drift lower if the economy continues to head lower.
Although the recent drop in the stock might look tempting for investors to act on, considerable downside risks remain and few major catalysts are visible for a rebound. Johnson Controls has a price to earnings multiple of about 10 times earnings. Since this company is involved in both the auto sector and heating and A/C components industry that relies heavily on new construction, it is not easy to directly compare this company to any other stock in terms of valuation. However, many stocks in the auto and industrial sector trade at just 5 to 8 times earnings. As one example of a supplier to the auto industry, American Axle & Manufacturing (AXL) currently trades at about $10, and has earnings estimates of $1.94 per share for 2012. That is a price to earnings multiple of about 5. That type of PE multiple could take this stock down below $20 per share, if earnings estimates continue to drop. As the global economy continues to drift lower, so could shares of Johnson Controls.
Here are some key points for JCI:
Current share price: $26.07
The 52 week range is $24.29 to $40.39
Earnings estimates for 2012: $2.68 per share
Earnings estimates for 2013: $3.22 per share
Annual dividend: 72 cents which yields 2.6%
Data is sourced from Yahoo Finance. No guarantees or representations are made. Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.