Update Johnson Controls (JCI)

You might think that the problem with Johnson Controls (JCI) was its exposure to the auto industry—especially the auto industry in China, where the company has a 45% share of the auto seating market. After all auto sales are slowing in China and European auto sales didn’t exactly zoom ahead in 2011. Or in the auto battery business, which is exposed to, you guessed it, any slowdown in auto sales.

But, no, the problem for nine of the last ten quarters has been in the building energy systems segment. In the December 2011 quarter—the first quarter of the company’s fiscal year—revenue growth in the building energy segment came in at 3%. That well below the projected 7% growth for the segment. Operating profit was about 20% below forecast and margins were also below forecast.

The problems with the building energy systems segment have meant that Johnson Controls has badly underperformed purer play auto suppliers such as BorgWarner (BWA). For 2012 through the close of April 11, shares of BorgWarner were up 22.74%. Shares of Johnson Controls were down 0.7%.

And I think Johnson Controls is likely to get hit by underperformance in its building energy systems segment again when it reports fiscal second quarter earnings on April 20. Johnson Controls didn’t use the last quarter to cut its forecast for the building energy systems unit to the bone in order to engineer the chance for a positive earnings surprise. Instead the company held to its target for the business and continued to look for margins for 2012 to improve by 0.5 to 0.7 percentage points over 2011. That seems really unlikely since the company was already behind the 2011 pace at the end of the first fiscal quarter.

In other words there’s a good chance that Johnson Controls will disappoint again when it reports fiscal second quarter earnings on April 20. (For the first quarter the company reported earnings of 60 cents a share, 2 cents a share below analyst projections.)

So what do you do if you continue to like the company’s long-term story, as I do, but are frustrated by the way that the continued negative surprises from the building energy systems business have negated the company’s strengths in auto interiors and batteries? Read more

A funny thing happened on the way to the end of the first quarter on Friday, March 30.

After leading the stock market for most of the quarter, cyclical stocks started to lag the Standard & Poor’s 500 Stock Index.

Is this a sign of what we can expect in the second quarter as worries about economic growth take the steam out of profits linked to the economic cycle? I’d say, Yes. I think we’re seeing the first signs that the pendulum, which swung to optimism and drove this rally, is swinging in the other direction.

Let’s start with some numbers. Read more

Ford’s new engine announcement shows direction of auto industry

Better gas mileage and enough power to keep customers happy.

You can see where the global auto industry is headed in Ford Motor’s (F) announcement that it will build its first three-cylinder engine.

The small engine—the smallest Ford has even used—will go into global car lines such as the Fiesta and Focus. By shrinking the size of the engine and using direct-fuel-injection technology Ford hopes to get up to a 20% improvement in gas mileage from these engines over its current smallest four-cylinder engines

And thanks to the addition of turbochargers, Ford thinks it will be able to get enough va-va-voom from its three cylinder engine to make up for their smaller displacement.

Ford hasn’t identified which auto supplier will provide the turbochargers for the three-cylinder engine. Read more

Update Johnson Controls (JCI)

After moving up 8% in the days before its third quarter earnings report, it would have taken something very special to keep shares of Johnson Controls (JCI) climbing on the actual news.

Didn’t happen. On July 20 the company merely reported record net sales of $10.4 billion, a 21% gain from the third quarter of 2010 and beat Wall Street projections of 54 cents a share by a meager 4 cents a share. And so the stock dropped 4.4% on the day.

Might not be a bad time to pick up shares of a company projected to grow earnings by 24% in fiscal 2011 (which ends in September 2011) and 35% in fiscal 2012 but that trades at just 17.7 times trailing 12-month earnings and 12 times projected earnings per share. The stock is a member of my Jubak’s Picks portfolio.

Johnson Controls had two problems with its earnings report. First, the company had to argue that supply chain disruptions from the Japanese earthquake and tsunami made adjusted numbers more accurate than the typical GAAP numbers. Johnson Controls figured that the disruptions cost it $400 million in sales. And second, the company guided fourth quarter earnings (after excluding one-time items) inline with Wall Street expectations of 80 cents a share. Of course that would be a nifty 38% increase in earnings per share from this quarter, but I guess that’s disappointing to any analyst who expects a company to always raise projections.

Anyway, the company’s growth was strong across all its segments. Automotive experience sales—what you and I might call auto interiors—grew by 21% in the quarter from the third quarter of 2010. Power solutions—batteries—sales rose 22%. Building efficiency—heating and cooling and building energy management systems—grew sales by 21%.

Boring, huh?

Not so boring was the Johnson Controls China story. The company already has a 45% share of the auto seating market in China right now and looks to be able to increase that share in upcoming quarters. In its conference call Johnson Controls said it will meet its goal of $4 billion in sales in China this year.

Projections of slower growth in the United States in the rest of 2011 suggest that Johnson Controls might take a little longer to meet my target price of $54 a share that I had projected for December. As of July 21 I’d calculate a target price of $55 by March 2012. The stock closed at $40 a share on July 21.

Full disclosure: I do not own shares of Johnson Controls 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 did own shares of Johnson Controls as of the end of March. For a full list of the stocks in the fund as of the end of March see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/ A full list of the fund’s holdings as of the end of June will be posted this week.

Update Johnson Controls (JCI)

On paper Johnson Controls (JCI) looks like a cheap growth stock. Wall Street projects earnings growth of 24% in fiscal 2011 and 35% in fiscal 2012. Trading at just 17.7 times trailing 12-month earnings per share and at 16 times projected earnings per share, Johnson Controls sure looks reasonably priced.

But growth stocks are only cheap if projected growth is actually going to turn into real growth. And frankly on this front, the company’s decision, announced on May 18, to end its lithium-ion battery joint venture with Saft made me raise an eyebrow. Sure, Johnson Controls is the largest maker of batteries in North America and the company dominates the lead-acid battery market with a 36%, but that’s an old, established technology. What about the future? Show me the growth.

A month later, I’ve got a much better idea on why the company filed to terminate that joint venture and where it sees growth opportunities. (Johnson Controls has been a member of my Jubak’s Picks portfolio http://jubakpicks.com/the-jubak-picks/ since September 2009.) Read more