Europe Weighs On Johnson Controls’ Earnings And Outlook

The slowdown in Europe impacted first quarter (of fiscal 2013) earnings of Johnson Controls (NYSE:JCI). Lower automotive production and declining non-residential construction spending in Europe offset higher automotive production in Asia and North America and higher construction spending in China. As a result, earnings of the company declined 16% y-o-y to $0.52 per diluted share in the first quarter of fiscal 2013. ^[1]

Johnson Controls serves automotive markets with automotive batteries and interiors; building markets with heating, ventilation and air-conditioning (HVAC) systems; and energy and other real estate management services. Going forward, the company anticipates lower y-o-y earnings in the second quarter of fiscal 2013, with full fiscal 2013 earnings to be in line or above that of fiscal 2012.

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Europe Offsets Growth From Asia And North America

The automotive industry production increased 11% in North America and 3% in Asia in the quarter, but this was offset by 9% decline in Europe. As a result, sales at the automotive interiors division of the company declined 1% y-o-y to $5.2 billion in the quarter. ^[1] The automotive interiors division manufactures seats, door and front panels, floor consoles and other electronic interiors for automobiles. Profits at this division also declined 50% y-o-y as improvement in North America were more than offset by higher engineering and product development costs and lower volumes in Europe.

At the automotive battery division, sales increased 4% y-o-y in the quarter driven by double-digit growth in shipments in Asia. ^[1] Demand from Europe was also marginally higher in this segment, but aftermarket demand in North America was lower. In all, segment profits at this division declined 3% y-o-y. ^[1]

At building related businesses, higher sales in Asia were again offset by lower demand from Europe and North America. As a result, sales in the division were flat on a y-o-y basis.

Weak Outlook For Second Quarter

The company anticipates that lower demand from Europe will offset growth provided by Asia and North America in the next quarter as well. It forecasts earnings of $0.40 – $0.42 per share in the second quarter of fiscal 2013, down 30% from $0.60 per share in the year-ago period. ^{[1] [2]}

However, restructuring activities, which were undertaken in the fourth quarter of fiscal 2012 and included work force reductions and plant consolidations, will improve earnings in the second half of fiscal 2013.

We currently have a stock price estimate of $30.36 for Johnson Controls, marginally below its current market price. We are in the process of incorporating first quarter earnings and will update our analysis shortly.

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1. Johnson Controls Reports First Quarter Fiscal 2013 Financial Results, January 18 2013, www.johnsoncontrols.com [↩] [↩] [↩] [↩] [↩]
2. Fiscal 2012 Q1 10-Q, February 3 2012, www.johnsoncontrols.com [↩]