Johnson Controls (NYSE:JCI) will be reporting its second quarter earning results for the present fiscal year 0n 20 Apr, 2012. Despite a stronger U.S. economy, the company is expected to post weak growth on account of tightening government regulations on emissions, weaker automotive aftermarket battery demand and continued weakness in the European market. The company is expected to post revenues of $10.6 billion for the previous quarter, a growth of 5% over the same quarter of the prior year. The earnings are, though, expected to decline slightly.
Johnson Controls principally competes with other automotive battery manufacturers like Exide Industries (NYSE:XIDE) and Magna International (NYSE:MGA). We currently have a Trefis price estimate of $38 for Johnson Control’s Stock, around 19% above the current market price.
See our full analysis of the Johnson Controls stock here
New environmental standards are increasing capital expenditures for the company
The U.S. Environmental Agency has issued new guidelines for air toxics standards of secondary lead smelters. Johnson Controls estimates that it will have to spend $600 million on meeting these new standards. The company had started this up gradation work across its lead smelting plants in North America last quarter. The company has passed the estimated cost of $162 million on these initiatives to its customers, raising the prices of its products by 8%. This would have significantly impacted the sales of the company in this quarter.
Weather related softness in the battery market
Generally, the sales in the second quarter of Johnson Controls are strong due to cold weather conditions. Cold conditions generally leads to a jump in the sales of car batteries as well in the demand for heating products. However, warmer than usual weather in this winter season would have adversely affected the sales of Johnson Controls. [1]
Lowered capacity in China
Johnson Control’s Shanghai plant continued to be stay shut after Chinese authorities cracked down on it for violation of environmental standards. This has significantly reduced the capacity of Johnson Controls in the country. China is one of the biggest markets for Johnson Controls and it has over 45% of the car seating market share in that region.
Weak sales of automotive industry in Europe
On the back of weak macroeconomic conditions, the automotive industry of Europe continues to battle weak consumer demand. According to a forecast by Fiat, the new car sales will decline in Europe for the fifth consecutive year to around 13 million. These declining sales will significantly impact the revenue and profitability of Johnson Controls in that region. [2]
In spite of the slight weaknesses expected in the results of Johnson Controls, we feel the company’s business continues to remain healthy. Although the company’s stated goal of double digit growth might be slightly far reaching, an improved performance in the next few quarters will certainly make it feasible.
Notes:- Johnson Controls Reports Record Sales and Earnings for Q1 2012, Market Watch, 19 Jan – 2012 [↩]
- Fiat sees Europe car sales down for fifth year, Reuters, 4 Apr – 2012 [↩]
