Update Johnson Controls (JCI)
Forget about the penny miss in quarterly earnings. Put a failure to increase guidance for the full year on the back burner.
Wall Street seems to be nervous about the long-term direction of Johnson Controls (JCI). At a time when exposure to China is a worry rather than a growth opportunity, Johnson Controls is committed to growing its business there. Today’s miss and lukewarm guidance are really just an excuse for short-term thinkers to jump ship. And jump they have today. The stock is down 6.7% for the day as of 11:30 a.m. ET on July 23.
Before the New York markets opened on July 23, Johnson Controls reported earnings for the third quarter of its fiscal year of 54 cents a share. That was a penny worse than Wall Street had expected, but still represents earnings growth of 116% from the third quarter of fiscal 2009. Revenue climbed by 22% from the third quart of fiscal 2009, edging just above consensus.
The company’s guidance for the fiscal year came in a little short of Wall Street projections too. The company said it expects full year earnings of $1.95. That’s up slightly from earlier guidance of $1.90 to $1.95 a share, but it is a bit below Wall Street estimates of $1.98. In the full 2009 fiscal year Johnson Controls lost 31 cents a share so even the horribly disappointing $1.95 a share represents quite a turn around.
So why the big sell off?
Two reasons.
First, in the run up to the earnings report analysts had started to down grade the stock on valuation. It was simply too expensive at or near $30, especially to investors who figured that the stock would hit resistance at its April 19 high of $34.50. So the earnings report on July 23 was a reason to sell.
And of course, Wall Street being Wall Street, analysts were out the day of the selling to say that Johnson Controls, down 7%, was now a buy on valuation.
Second, Johnson Controls has big exposure to China’s auto industry—and the company seems committed to growing that presence. Evidence? On May 21 Johnson Controls made an offer to buy the auto interiors and electronics business of Visteon (VSTNQ). (Visteon, the former parts division of Ford (F), filed for Chapter 11 bankruptcy reorganization in May 2009.) Visteon rejected the deal but the damage had been done: In explaining why it made the offer Johnson Controls had touted the $7 billion in revenue that the company would do in China in 2011 after it integrated Visteon’s operations.
Everybody is nervous that China’s growth is going to slow. Maybe even plunge on the bursting of the country’s real estate bubble. And Johnson Controls wants to do more business in the country? Let me out of here!! (For more on a possible bursting of the Chinese real estate bubble, see my post If China were to have a real estate bust, what would it look like? )
Of course, the China story that drives short-term investors and traders nuts about Johnson Controls is one of the reasons that long-term investors want to own this stock.
As of July 23 I’m leaving my target price for Johnson Controls at $39 a share but stretching out the time table to January 2011 from July 2010.
Full disclosure: I own shares of Johnson Controls in my personal portfolio.
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Yes, a VERY nervous market! And for lots of good reasons, not just China.
The next big sell-off for Jim to address is TEVA. That one’s really in the tank but I’d like to know just how much of this move is legitimate.
Off topic: Anyone know what’s going on with TEVA? It’s down nearly 10% and I haven’t been able to find any explaination whatsoever.
greedibank, great minds worry alike!
Saw this on Barrons today:
“JCI announced it would pay $90 million to purchase 90% of its joint venture with Korea’s Delkor to make batteries for hybrid-electric vehicles.”
This is the other piece of news in their earnings report today, and is another reason to like JCI long-term.
Off topic on TEVA… this may be part of the reason:
“Momenta Pharmaceutical climbs after FDA approves generic drug
The FDA said it approved a generic version of Lovenox, an anti-coagulant drug used to prevent deep vein thrombosis. Approval of generic enoxaparin sodium injection has been granted to Novartis (NVS) subsidiary Sandoz, which developed the drug in partnership with Momenta (MNTA). Under the terms of a general partnership agreement between the companies, Momenta will receive a profit share based on product sales if the parties are successful in their commercialization strategy, according to a 2003 press release announcing the general partnership. In addition, Sandoz will pay development and commercialization costs and make certain other payments to Momenta. Sanofi-Aventis (SNY), which produces Lovenox, generated revenue of EUR3.043B from the drug in FY09. In late morning trading, Momenta rose 45c, or 3.77%, to $12.38, while Novartis (NVS) lost 34c to $49.22 and Sanofi Aventis slid $1.42, or 4.63%, to $29.23. :theflyonthewall.com”
I’m long TEVA and may need to look at scooping more up.
Off on TEVA again… found a Reuters article that stated TEVA was working on the same generic as mentioned in article in previous post. Seems to be an extreme reaction.
Thanks, Jim. I sold JCI in spring and made very good gain. Now I am looking to buy it back.
Thanks Jim,
I’m long JCI and thinking about buying more. Can you update on STP…are you thin king of adding it from the watchlist. The stock has moved a bit as have others in the sector.
Thanks again.
Thanks Run26.2 I saw some of that info after I posted. I agree a 10% drop seems rather harsh and will also consider adding to my position (which means the rest of you should probably sell! I’ve go the reverse Midas thing going on!)
on TEVA, you should also look at the volume. someone sold a huge chunk of shares which is what see as the main reason it dropped so much. I had been looking for an entry point and this provides it.
bought some TEVA today, will buy more at $45 if it gets there. One day the opinion on pharma will change
THEPROPHET… thanks for the heads-up on the big trade on TEVA. Bad insider info?
I did add a little to my position today.
Not usually such a thing as bad insider info… Could be a timed sell, but usually insiders know something, I wouldn’t blow it off completely.
I’m not sure why my last post was deleted. I’ll try again (sorry it’s off-topic) There was a post at fiercepharma.com that explained that there was a court ruling against Teva that might lead to them having to pay damages.
But even so it is most likely an over-reaction, i”m sure Jim will comment eventually!
THEPROPHET yep your right 49 was the entry point I was hopping for as well.
greedbanks Teva does have law suits out there all these companies sue each other. But 8.5% drop?
I got some research to do on teva Sunday.
Thanks Jim I sold JCI a while back but with this article will look into buying back in.
Chinese Banks See Risks in 23% of $1.1 Trillion Loans (Update1)
http://noir.bloomberg.com/apps/news?pid=20601087&sid=aeDIAJ0xKAcE&pos=2
Ed:
few days back you mentioned EDC a buy < 30, what do you think of wdc now ?
Appreciate your response
Ed:
Sorry I was asking about WDC (not EDC.. typo error )
Got smart for a change. Swapped my 40 shares IBM for little less than $1 profit each, rolled it into 150 of JCI @ 28.47. The earnings potential just made more sense. Wanted to buy TEVA, but not willing to sell PBCT, TQNT, & C, at going prices. When I bought IBM last week, it was that or AAPL. Chose wrong then, hoping JCI over TEVA works now.
nitin_kakkar,
Even though WDC is technically off-topic, it actually bears some similarities to JCI. Both of them reported great earnings, but because analysts had expected better-than-great, both stocks tanked.
WDC was undervalued before their earnings report, and now it is disgustingly undervalued. Here we have a company that is taking market share in their industry, and moving into a dominant position due to lower cost and arguably equal or greater quality. And it merits a P/E lower than BP or GS? Puh-lease!
I would call WDC a stronger buy than it was before. I already doubled my position in it.
Ed,
Off subject for a small speculative tech stock have you seen CKSW? Just wondering what your take would be.
Thanks
Hi Ed,
Wondering your thoughts on companies like CBI and JEC right now and going out 6-12 months as an investment?
Can anyone doubt a Bull run is starting now and going at least through Thanksgiving? Look at the charts of the major averages. All have down trends broken and head and shoulder bottoms in. There will be some consoladation next week for buying opportunities. Just throwing darts at a list of stocks and following those you hit will probably work. Curse me now-thank me later.
Any thoughts on competitor Eaton Corporation?
java12jack,
Regarding CKSW, I tend to avoid Israeli stocks, because of the inherent risk involved in that part of the world. If that doesn’t concern you, then CKSW looks ok.
OJunker,
You have to like CBI’s chart, breaking the upper resistance like they have. The financials are ok too. All the recent news stories look positive too.
JEC is another one breaking through upper resistance, but I’m not sure how far it can go. The forward P/E is already over 14. Anything that high better have some major growth in it. I’m not sure JEC has the upside to make it worthwhile.
bledidork,
I’m not crazy about ETN. The debt is a touch high (0.53) for negative free cash flow and already high forward P/E (over 12). A very borderline stock at best, unless they can get some significant growth. A PEG of 1.00 is not a positive sign. At best, this is a fairly valued stock that will take years to make you enough money for you to bother with. Finally, most of the recent analyst target prices place this stock in the $70-80 range, and it’s already above $77.
Ed,
What are your thoughts on TEL, especially since they are buying ADCT?
jamba,
TEL overpaid (who doesn’t?), but then they get this little red flag:
http://finance.yahoo.com/news/Faruqi-Faruqi-LLP-bw-3331406802.html?x=0
It may be nothing, it may be something. But the ADCT buyout is nothing that makes TEL a strong buy.