Monday, August 16, 2010

Johnson Controls: A Double Play (Unfortunately) JCI

I'm not sure that the automotive side is going to be a big winner until personal income tops the 2007 figure.
Despite a glowing cover story the stock is only up 1.9% ay 27.89. From Barron's:
Totally In Control 
Johnson Controls is greening the Empire State Building—and investors' wallets. A promising play on an auto revival and a cleaner world.

JOHNSON CONTROLS IS THE RARE COMPANY whose name is also a declaration—and an apt one.

Johnson controls the temperature and mechanical functions in offices and schools, through its building-management business. Johnson controls, more than any other supplier, the power supply and interior feel of the world's cars, through its automotive-battery and seating divisions. And Johnson controls its business with uncommon discipline, long-term planning, a focus on the best-positioned industry segments and regions, shrewd allocation of capital and a shareholder-friendly orientation.

Pair these attributes with what looks to be a multi-year rebound in auto production, and fast-growing demand for greener, cleaner and less costly building-maintenance technologies, and it would seem the company's stock, at an undeservedly modest valuation of less than 12 times next year's expected earnings, could outperform significantly in coming years.

Considering its nearly $20 billion market value and 125-year history, Johnson Controls (ticker: JCI) is among the country's quieter corporate icons, befitting its Midwestern heritage and the behind-the-scenes role played by its products as components of much larger systems. Warren Johnson patented the thermostat in 1883, one of 50 patents he secured, most involving the regulation and deployment of heat and energy. This focus on the delivery of power and comfort, when and wherever it is needed, links Johnson Controls' three major business divisions today.

The largest of the three, which the company calls Automotive Experience, provides car-interior components—mostly seats and dashboard-control panels—to auto manufacturers. Power Solutions makes car batteries, for both auto makers and the after-market. Johnson Controls is the market leader in both of its auto-supply businesses.

But recently the fastest-growing division has been Building Efficiency, which makes and services products used in the heating, ventilation, security and lighting of large buildings for governments, colleges and big corporations. As its most prominent assignment, the company is leading the retrofitting of all mechanicals in the nearly 80-year-old Empire State Building, for which it will guarantee energy-cost savings that will pay for the project in less than four years.

THE BUILDING-CONTROLS UNIT represents a long-term bet on the interest of big landlords in integrating and outsourcing critical building functions to pursue cost savings and optimal building performance. New technologies that automate temperature control, air flow, lighting, elevator operation and security are allowing companies such as Johnson Controls, Honeywell International (HON), Siemens (SI) and United Technologies' (UTX) Carrier division to create stable and nicely growing businesses in this largely invisible role.

Temperature Rising

The shares have tripled from their 2009 low and could keep running to the high 30s.
[JOhnson_C2] None
Johnson Controls dramatically raised its profile in this arena five years ago with the acquisition of York International. The deal was widely praised as well-executed and indicative of the company's record of value-creating acquisitions, a relative rarity among large companies. Revenue and profits from the building-controls area more than doubled between fiscal 2005 and 2009 (Johnson's fiscal year ends Sept. 30), and its contribution to the company's total revenue rose to 37% in the first nine months of fiscal 2010 from 21% in fiscal 2005.

This has made Johnson Controls, which still is viewed too often as a a pure auto-parts supplier, into a better-diversified and less cyclical industrial company. Not that a better balance allowed the company to sidestep the auto sector's slide amid the recession of 2008-'09, when its auto-related revenue fell by a third. But it helped Johnson weather the collapse better than it otherwise might have, and gain market share at the expense of financially weaker competitors, leaving it well positioned to meet long-term financial targets.

JOHNSON'S THREE DIVISIONS together had revenue of $28.5 billion in the fiscal year ended Sept. 30, 2009. But the company swung to a loss of $338 million, or 57 cents a share, from year-earlier net of $979 million, or $1.63 a share, as global auto sales collapsed in the financial crisis and recession.
The shares also took a body blow as automotive and commercial real-estate markets seized up, falling to below 9 in March 2009 from a high above 40 late in 2007.

Johnson trades for about 28, which leaves the stock valued at 14 times forecast earnings of $1.96 a share for the fiscal year ending next month, and 11.5 times fiscal 2011 estimates of $2.42. That represents an unwarranted discount to a blend of the company's industrial-conglomerate and auto-supplier peers, which command price/earnings ratios closer to 12 to 14 times next year's projected profits. Some analysts think the stock could trade up to the mid-30s in the next year, as the dimensions of the company's recovery become clear. At the peak of its profitability, in 2007, Johnson earned $2.16 a share, on revenue of $34.6 billion....MUCH MORE

Underrated Power

Despite its business mix, including a stable revenue stream from building-control products and services, Johnson' Controls shares are valued more like a pure auto-supply company than the well-managed industrial conglomerate.

Recent Market 2010E 2010E 2011E 2011E Div
Company/Ticker Price Val (bil) EPS  P/E EPS P/E Yield
Johnson Controls/JCI$27.91$19$1.96 14.2$2.42 11.51.9%
Eaton/ETN75.68135.05 15.06.13 12.33.1
Honeywell Intl/HON41.29322.5216.43.0413.62.9
United Technologies/UTX70.58664.7115.05.3513.22.4
Source: Thomson Reuters