Johnson Controls Sees Higher Profit
Johnson Controls Inc. (JCI) projected higher sales and earnings in fiscal 2013 based on its continued investments in technology and global expansion, despite challenging market conditions. The company expects earnings per share in the band of $2.60 to $2.70 for the year, up 0.4%–4.2% from the prior year.
Revenue is expected to improve 3% to 4% to $43.5 billion in the year, driven by growth in automotive production in North America and China, partially offset by lower production in Europe. Meanwhile, global non-residential construction spending is projected to be flat year over year, due to weaknesses in North America and Europe, which will likely offset the strength in the emerging markets of Asia.
Segment Outlook
Revenues in the Automotive Seating are expected to grow 2% in fiscal 2013, based on higher production volumes in North America, partially offset by lower production in Europe. Margins will be around 4.2% to 4.4%, driven by operational efficiency and benefits from the cost cutting measures, partially offset by lower production in Europe. Revenues in the Automotive Electronics are expected to swell 2% due to higher volumes in Asia, partially offset by lower electronics sales in Europe.
Revenues from the Building Efficiency segment are estimated to increase 2% to 4% in the year due to growth in the emerging markets and moderate recovery in North America Systems and Service. Segment margins are expected to increase to 6.4%–6.5%, due to improved operating leverage, pricing actions and the benefits from cost reduction initiatives.
Revenues from the Power Solutions segment is expected to increase 10% to 12%, attributable to higher battery volumes across all regions and channels, higher production in China, and increasing market demand for AGM batteries, which are used in Start-Stop vehicles. Segment margins will be around 14.6% to 14.8% due to an improved product mix and continued operational improvements.
Johnson Controls plans capital expenditures of $1.4 billion in 2013, 80% of which will be allocated toward growth and margin expansion opportunities. The increased capital expenditures will be mainly focused on raising manufacturing capacity for AGM batteries, expansion in the emerging markets and launch of new Automotive Experience businesses throughout the year.
Mid-Term/Long-Term Outlook
In the next five years, Johnson Controls expects annual margin expansion of 30 to 40 basis points in the Automotive Seating business, driven by positive impact from vertical integration, operational improvements and better quoting disciplines. After few years, the company expects margins to improve to 7% to 8% in the business.
In the next five years, the company anticipates annual margin expansion of 60 to 70 basis points in its Automotive Electronics and Interiors business led by higher profitability in Electronics, an operational turnaround in Interiors and cost reduction measures. In the next few years, margins are expected to rise to 4%–6% in the business.
The company expects the Building Efficiency segment to record annual margin expansion of 40 to 50 basis points, based on improved supply chain management and growth in the emerging markets. Margins from Power Solutions are expected to improve 200 basis points by 2017, driven by better product mix, manufacturing efficiencies and favorable impacts from vertical integration.
Johnson Controls reported adjusted earnings per share of 77 cents in the fourth quarter of 2012 ended September 30, 2012, ahead of the Zacks Consensus Estimate of 75 cents and up 1.3% from 76 cents a year ago. Earnings were in line with management's expectation of 0% to 5% growth in the quarter.
Management believes that earnings were favorably impacted by improved profitability in Building Efficiency, Power Solutions and North America Automotive Experience businesses. However, these were mostly offset by weak performance in automotive and buildings markets in Europe.
The company’s revenues for the quarter decreased 3.6% to $10.4 billion. It was marginally lower than the Zacks Consensus Estimate of $10.8 billion. However, excluding the impact of foreign exchange, revenues edged up 1% in the quarter.
Johnson Controls is a supplier of automotive interiors, batteries, and other control equipments. Its main competitors include Magna International Inc. (MGA) in the Automotive Experience segment, Honeywell International Inc. (HON) in the Building Efficiency segment and Exide Technologies (XIDE) in the Power Solutions segment.
The company currently retains a Zacks #4 Rank, which translates to a short-term rating (1–3 months) of Sell and we reiterate our Underperform recommendation on its shares for the long term (more than 6 months).
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