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Investment Overview for Johnson Controls (NYSE:JCI)
Below are the key drivers of Johnson Controls' value that present opportunities for upside or downside:
- Automotive Batteries EBITDA Margin:
EBITDA margins for the Automotive Batteries division increased sharply from 14.1% in 2007 to 18.6% in 2012. Favorable pricing and product mix net of lead and other commodity costs as well as higher sales volumes contributed to the margin growth. We expect margins to remain stable over the remaining forecast horizon because support to margins from higher sales of the Absorbed Glass Mat (AGM) type battery will be offset by fierce competition in the industry and an increase in raw material prices.
Sales growth of automotive batteries is correlated with vehicle sales growth which can be adversely affected by continued deterioration of the economic environment. Continued high unemployment rates, erosion of consumer sentiment because of negative news flow, and contraction in auto loan issuance's can all negatively affect auto sales in the U.S., which in turn will hurt automotive battery sales. Moreover, the voracious appetite for natural resources from emerging countries may likely increase commodity prices by more than what we expect. These factors will hurt the Automotive Batteries EBITDA Margins, leading to potential downside to our present estimate for the stock.
If EBITDA margins decline to 16.0% by the end of our forecast period instead of our expected forecast of 18.6%, then there could be a downside of around 5% to the Trefis price estimate for the stock.
- Automotive Interiors EBITDA Margin:
Johnson Controls' Automotive Interiors EBITDA Margin has remained largely stable between 4% and 6% over the historical period with the exception of 2009 when margins dipped to 3.7%. We expect it to remain stable near its present levels of around 6.3% over our forecast horizon.
As a result of the availability of a large number of automotive interiors suppliers and a small number of major auto-makers to purchase products, buyers have more power in the automotive interiors industry. Margins can be adversely affected if auto-makers start negotiating further price reductions as part of their cost cutting initiatives or in the event of an automotive sales slowdown. In addition, increased competition from automotive interiors suppliers from emerging markets that compete on price can cause Johnson Controls to lower its prices to remain competitive. If the company is unable to generate sufficient production cost savings in the future to offset price reductions, it may negatively affect the division's EBITDA margins.
If the Automotive Interiors EBITDA margins decline to 5.0% by the end of the forecast period instead of our expected forecast of about 6.3%, then there could be a downside of around 8% to the Trefis price estimate for the stock.
Johnson Controls is a global diversified technology and industrial leader serving customers in more than 150 countries. The company creates products, services and solutions to optimize energy and operational efficiencies of buildings (Heating, Ventilation, Air Conditioning (HVAC) Systems); lead-acid automotive batteries and advanced batteries for hybrid and electric vehicles; and interior systems for automobiles.
Johnson Controls building efficiency business is a global market leader in the design, production, marketing and installation of integrated heating, ventilating and air conditioning (HVAC) systems, building management systems, controls, security and mechanical equipment. In addition, the building efficiency business provides technical services, energy management consulting and operational support for the entire real estate portfolios in the non-residential buildings market. It also provide residential air conditioning and heating systems as well as industrial refrigeration products.
The firm is one of the largest automotive suppliers of interior products and systems for vehicles. Its technologies extend into virtually every area of the interior market, including seating and overhead systems, door systems, floor consoles, instrument panels, cockpits and integrated electronics. Customers include most of the world’s major automakers.
The power solutions segment services provides lead-acid automotive batteries for virtually every type of passenger car, light truck and utility vehicle. The company serves both automotive original equipment manufacturers (OEMs) and the general vehicle battery aftermarket. It is the leading supplier of batteries to power start-stop vehicles as well as lithium-ion battery technologies to power certain hybrid and electric vehicles.
Heating, Ventilation, Air Conditioning (HVAC) Systems and Services (HVAC Systems, Technical Services, Global Workplace Solutions) is the largest contributor to Johnson Controls' stock. This is followed by Automotive Interiors and Automotive Batteries.
Johnson Controls HVAC System market share
Johnson Controls HVAC system market share represents Johnson Controls' revenues from HVAC systems as a percentage of the HVAC market size. We expect it to remain stable near its 2011 levels throughout our forecast horizon as HVAC systems is a very competitive market with major players well matched in technology capabilities. Johnson Controls quick expansion in emerging countries, especially in China can provide upside as emerging countries are projected to contribute most to the HVAC market growth.
Johnson Controls Automotive Interiors market share
This represents Johnson Controls Automotive Interiors revenues as a percentage of the global automotive interiors market size. We believe this driver will decline marginally in 2013 and then remain stable over the remainder of the forecast period. Growth of the driver will be supported by a high level of vertical integration by Johnson Controls which enables the company to provide automobile OEMs at a cost effective offering to meet their requirements. In addition, Johnson Controls investment on research will help the company develop and introduce new products faster to the market. On the other hand, market share growth will be threatened by automobile OEMs design and the manufacture of their own interiors to gain better control over their costs and increased competition from emerging market manufacturers on price.
Johnson Controls Automotive Batteries market share
This represents the revenues of the Johnson Controls batteries division expressed as a percentage of the global lead acid battery market size. Johnson Controls has a commanding market share in automotive batteries which we expect will grow gradually over our forecast horizon. Market share growth will be supported by the fact that the company is a leader in the Absorbed Glass Mat (AGM) type battery which is likely to witness rapid growth. These types of batteries are used in start-stop technology for cars that allows the engine to shut down automatically while the car is idling and provides a fuel efficiency gain of around 15%. Additionally, Johnson Controls increasing presence in fast-growing markets especially China will aid growth in its market share.
Existing partnerships and distribution channels in major emerging markets will help Johnson Control exploit the HVAC market opportunities
Emerging markets, especially like China, are projected to contribute a major share of the future market size growth due to increasing income levels, continuing urbanization and lower current penetration levels of HVAC equipment.
Johnson Controls presence in major developing markets poise the company to take advantage of these growth opportunities and grow along with the overall market growth.
Both residential and non-residential construction to boom in emerging markets
As millions of people move from rural areas to cities over the next couple of decades there will be massive construction activity. Most modern premises utilize HVAC equipment.
According to a 2010 McKinsey estimate, 350 million Chinese - or more than the entire U.S. population - will move to cities over the next decade and half. McKinsey estimates that over 50,000 skyscrapers will be built over the next 15 years.
Increased emphasis on energy conservation will help drive sales of HVAC equipment
As petroleum and natural gas prices increase, many buildings may look to upgrade to more efficient HVAC equipment. This is particularly relevant for older constructions.
Government regulations to give a boost to the HVAC industry
The Energy Policy Act of 2005, which went into effect on Jan. 1, 2010, provides incentives for efficient energy technologies and conservation.
The act sets minimum efficiency standards for 16 consumer and commercial products, including commercial unit heaters and large commercial air-conditioners.
Focus on air quality to help sales of HVAC
Home owners are becoming increasing aware about air quality issues. Allergies are the 6th biggest cause of chronic illness in the U.S. This awareness will help increase sales of ventilation equipment.
Change in the mix of production of cars may affect the size of the automotive interiors market
Over the past few years, there has been a shift in developed markets to smaller size cars with lesser interior content. For instance, trucks and SUVs have higher interior content than small family sedans.
In the U.S., there has been a shift in production mix towards small cars due to fuel efficiency regulations and environmental awareness. This could impact the size of the automotive interiors market.
Use of in-car electronics to increase the price of automobile interiors
Many cars nowadays have electronically adjustable seats and high-tech instrument consoles. These options are even being introduced in smaller cars which should increase the price of the interior products, thereby increasing the automotive interiors market size.
Sales of Absorbed Glass Mat (AGM) batteries used in start-stop car technology have huge potential for growth.
Start-stop technology allows the engine to shut down automatically while the car is idling. This provides a fuel efficiency gain of around 15%.
Many car manufacturers in Europe have begun offering these batteries in new production cars. It is expected that the use of these batteries will spread to the rest of the world as well.
Johnson Controls expects worldwide production of these batteries to quintuple from 7 million in 2011 to about 21 million units in 2015.
Increased presence of electric and electronic accessories to increase the power output required from the battery
Most modern day cars (especially luxury cars) use power intensive electronic accessories such as electric seats and electric door mirrors.
These electric accessories require a larger capacity battery.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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