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Johnson Controls has been moving up but December 19 is the next big test

posted on December 14, 2012 at 5:27 pm
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Shares of Johnson Controls (JCI) are up about 13% from their November 11 low of $24.94.

But the stock faces a day of reckoning on December 19 when the company holds its first analyst meeting since the company issued very disappointing guidance for fiscal 2013. (Johnson Controls is a member of my Jubak’s Picks portfolio http://jubakpicks.com/the-jubak-picks/ .)

On October 30 the company reported earnings for its fiscal fourth quarter, which ended in September, of 77 cents a share. That was good enough to beat the Wall Street consensus estimate of 75 cents a share.

But then Johnson Controls dropped a bomb. Earnings for fiscal 2013 would be flat to just slightly higher than the $2.54 a share the company had earned in 2012. That was significantly below the consensus projection by Wall Street analysts of $2.90 for 2013.

The lower guidance for 2013 reflects both short-term problems for Johnson Controls connected to the global economy and longer-term missteps by the company.

In the short-term the company has been clobbered by the recession in Europe. Johnson Controls projects that automotive production in Europe will be down 10% from the 2012 levels and that will result in a drop in sales of Johnson Control’s auto seating and interiors business of about 1% from 2012 numbers. That’s worse than it sounds since year-to-year growth in this business had already dropped to 6.5% in fiscal 20112 from 21% sales growth in 2011 and 38% growth in 2010.

And, again in the short-term, Johnson Controls is seeing customers for it building efficiency unit—which manufactures, installs, and services for temperature, fire, and security management in non-residential buildings—stretch out their orders. Orders fell in the fiscal fourth quarter by 10% from the same quarter in fiscal 2011 led by a 22% decline in orders from Europe.

But the company also has longer-term questions to answer and I expect those to be the focus of analyst questions next week. 

  • The company has rapidly expanded capital spending in recent years, adding capacity just as the global economy slowed, and reducing the company’s once robust free cash flow. Management has suggested that capital spending will fall in 2013, but analysts will be looking for confirmation of that restraint.
  • The battery market hasn’t developed in anything like the direction or with the timing that had been expected, say, two years ago. The market for batteries for electric cars remains tiny and traditional lead battery technology has shown surprising life. That plays to Johnson Controls strength—the company is the largest battery producer in North America—but the direction of the lead battery market has itself become uncertain. What are being called “advanced lead-acid batteries” look increasingly like a next generation technology that will dominate the market while newer technologies figure out how to get production costs down. The market for advanced lead-acid batteries will expand by a compounded annual 20% a year over the next eight years, Pike Research forecasts, to hit $20 billion in sales by 2020. But there are actually several competing advanced lead-acid battery technologies and its not clear at this point which technology—enhanced flooded batteries or absorbed glass mat batteries or fast-charging lead-acid batteries to name three technologies—will capture what share of the market or when. Analysts will be looking to Johnson Controls to explain its technology bets and—more importantly in this context—to explain when battery margins will start to expand again.
  • Johnson Controls typically updates its take on the order backlog in its auto interior unit at the annual analyst day in December. The company went into 2012 with a backlog of $4.2 billion (as of November 2011), but a huge 53% of this backlog came from Europe. How has the recession there changed that figure?

These aren’t trivial questions. Fortunately, the company’s big downgrade to guidance for 2013 means that Johnson Controls doesn’t have to be perfect in its answers in order to keep the stock moving ahead in 2013. I’m still positive on these share but I’m lowering my target price to $37 a share by December 2013 from my earlier $44 a share target.

Next week is very important for these shares.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , may or may not now own positions in any stock mentioned in this post. The fund owned shares of Johnson Controls as of the end of September. For a full list of the stocks in the fund as of the end of September see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/

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