Johnson Controls’ Earnings Will Show If Asian Growth Can Offset European Weakness

Johnson Controls (NYSE:JCI) will announce the fiscal fourth quarter earnings of 2012 on Tuesday, October 30. The company posted moderate growth in the first three quarters of this fiscal year driven by growth in Asia and North America partially offset by a decline in Europe. Net sales were $31.5 billion, up 5% y-o-y, and earnings were $1.73 per share, up 9% y-o-y in the nine months ended June 30, 2012. ^[1]

In the fourth quarter, due to continued softness in the global markets and a weaker euro, the company forecasts y-o-y earnings growth in the range of 0%-5%, down from its earlier forecast of double-digit growth. ^[1] In addition, earnings will be impacted from restructuring charges. All in all, Johnson Control will likely post moderate growth in its fourth quarter earnings.

We currently have a stock price estimate of $28.68 for the company approximately 15% above its current market price.

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Growth provided by Asia to be partially offset by Europe

The automobile industry in the fast-growing economies of Asia, particularly China, have been posting strong growth over the past few years. Johnson Controls, which manufactures automotive batteries and automotive interior systems, has been expanding its presence in these markets to take advantage of this growth. In June earlier this year, the company announced an investment for its fourth automotive battery manufacturing facility in China. ^[2]

Driven by its increasing footprint in these fast-growing markets, the company’s sales from Asia have posted strong growth in the first three quarters of fiscal year 2012. In the nine month ended June 30, 2012, the automotive interiors business sales from Asia increased 15% y-o-y to nearly $2 billion. ^[1] We anticipate the strong performance to continue in the fourth quarter.

In comparison, in Europe, the automotive interiors business sales increased a mere 1% y-o-y while sales in heating, ventilation and air-conditioning (HVAC) business witnessed a y-o-y decline of approximately 6% in the nine months ended June 30, 2012. ^[1] Due to persisting weak economic conditions in Europe, we anticipate the declining trend in sales as well as earnings from the region to continue in the fourth quarter.

Restructuring charges to impact fourth quarter earnings

Johnson Controls also initiated restructuring activities in the fourth quarter to better align its resources with growth markets and reduce its cost structures. These restructuring activities, which include workforce reductions and plant consolidations, will result in an estimated pre-tax charge in the range of $225 to $275 million in the fourth quarter. ^[3] This compares to income before tax of $504 million in the third quarter. ^[1] So, the additional charge will significantly impact the fourth quarter earnings. These restructuring activities are expected to continue till the end of fiscal year 2014.

On the whole, Johnson Controls’ fourth quarter earnings will be driven by growth from Asia partially offset by the sales decline in Europe and restructuring charges.

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1. 2012 Q3 10-Q, www.johnsoncontrols.com [↩] [↩] [↩] [↩] [↩]
2. Johnson Controls announces plans to build automotive battery manufacturing facility in Tianjin, China, www.johnsoncontrols.com, June 6th 2012 [↩]
3. Johnson Controls Provides Details of Q4 Restructuring Plans and Changes to Pension / Post-Retirement Accounting Policy, October 22 2012, www.johnsoncontrols.com [↩]