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Shares of Johnson Controls (NYSE:JCI) declined considerably after it reported earnings last quarter, but thanks to a market rally based on more government stimulus the stock has recovered nicely. However, investors might want to consider selling or shorting the stock now, as the company looks challenged in view of the recent economic data coming from China, Europe, and the United States.

Last quarter, Johnson Controls reported a profit of 61 cents per share, which was below analyst estimates of 66 cents per share. This quarter, consensus estimates are at about 75 cents per share, so the bar is set even higher. Furthermore, it appears that a number of core regions and industries have deteriorated in the past several weeks. For example, economic data in China shows reduced demand in many areas. Johnson Controls has sales and operations in China and a substantial amount of revenues coming from Europe as well. In particular, this company could be impacted by weakness in its automotive division as the European car market is under heavy pressure. A recent article summarizes the concerns of Peugeot's (OTCPK:PEUGY) CEO, who said that there will be no recovery in European auto sales for years, and that German auto sales are now starting to weaken, which is a bad sign for every company in the auto sector. Johnson Controls has supplied automotive products to Peugeot and other European automakers, which are responding to negative industry conditions by cutting production and closing plants.

The United States economy is showing signs of a new slowdown and it could be poised to get much worse with the fiscal cliff, when the government cuts back on spending and raises taxes in 2013. The Chicago Purchasing Managers Index has just dropped below 50 for the first time since 2009. That level could be indicating that a recession is coming and when the U.S. economy declines, it will likely make things even worse in Europe and China.

When compared to many other companies, Johnson Controls is more sensitive to an economic downturn since it manufactures automotive, heating, air-conditioning, and other products. In 2011, the company had about $20 billion in auto-related revenues, nearly $15 billion in the "building efficiency" division -- which includes heating and air conditioning, etc. -- and almost $6 billion in the "power solutions" division. This shows that the company is heavily dependent on the health of the auto industry.

While car sales have been strong in the United States, that trend could be reversed and follow the declines recently seen in European. Furthermore, even as car sales have been strong in the U.S., shares of GM (NYSE:GM) and Ford (NYSE:F) have underperformed, which could be another sign that the markets do not believe auto sales will remain strong, even in the U.S. Consumers and businesses are likely to buy fewer cars, and hold off on buying heating or air conditioning systems if the economy continues to trend down. Another concern is the balance sheet, which currently shows about $610 million in cash and around 6.6 billion in debt. That is a large debt load, particularly if major regions like China, Europe, and the United States all start to sink in unison in the coming quarters.

Just days after Johnson Controls reported earnings last quarter, the stock made a new 52-week low. Based on signs of global economic deterioration, a looming fiscal cliff, and a heavy debt load, it would not be surprising for this stock to revisit the 52-week low, if not make new lows, when the company releases earnings and what could be very cautious forward guidance. Investors should consider the recent bounce in the stock as an opportunity to sell or short the stock, as lower prices could be coming soon.

Key Data Points For Johnson Controls:

  • Current Share Price: $28
  • 52-Week Range: $23.37 to $35.95
  • Dividend: 72 cents per share, which yields 2.6%
  • 2012 Earnings Estimate: $2.52 per share
  • 2013 Earnings Estimate: $2.93 per share

Data is sourced from Yahoo Finance.

Disclaimer: No guarantees or representations are made. Please consult a financial advisor before making investments.

Source: Why Shares Of Johnson Controls Should Be Sold Or Shorted