Johnson Controls’ European Exposure To Weigh On Earnings

Johnson Controls (NYSE:JCI) will announce the second quarter earnings of its fiscal 2013 Tuesday, April 23. The company earlier anticipated earnings in the range of 40-42 cents a share, down around 23% from 53 cents a share it posted in the second quarter of fiscal 2012. ^{[1] [2]} The lower year-over-year (anticipated) earnings are a result of a decline in the automotive production and construction spending in Europe, which constitutes close to 40% of the company’s total sales. ^[3] However, the negative impact from the economic slowdown in Europe is expected to be partially offset by growth from the emerging economies, especially China.

We currently have a stock price estimate of $34 for Johnson Controls, approximately in line with its current market price.

See our complete analysis of Johnson Controls here

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Lower Automotive Production And Construction Spending In Europe Will Weigh On Results

In the previous quarter, auto production in Europe had contracted by 9%. ^[1] The demand for new automobiles, cars as well as other vehicles, continues to be low from the continent and in response, Europe’s auto production is expected to decline by double digits in 2013, according to Johnson Controls estimates. ^[4] This will weigh on demand for automotive interiors like seating, electronics and door/floor/front panels, and automotive batteries manufactured by Johnson Controls. Further, the company’s exposure to Europe in its automotive businesses is higher than that in some of its other businesses. For instance, in automotive interiors, Europe constitutes nearly 50% of Johnson Controls worldwide auto interior sales and in automotive batteries, Europe constitutes nearly a third of the company’s total battery sales. ^[4] Thus, the impact from a decline in auto production in Europe, will be severe on Johnson Controls.

Also, residential as well as non-residential construction spending is expected to continue to decline in Europe in 2013, due to its sovereign debt crisis. This will impact sales of heating, ventilation and air-conditioning (HVAC) systems provided by the company.

Restructuring Costs Will Impact Margins

In addition, Johnson Controls initiated several restructuring activities like headcount reductions and plant consolidations in the fourth quarter of fiscal 2012, to better align its resources with growth markets and to reduce its cost structures. These activities will incur significant one-time costs in the second quarter, and thus impact margins. Overall, the company anticipates restructurings to impact earnings by 8-10 cents a share in the first half of fiscal 2013. ^[4] However, the second half onward, gains from these restructurings are expected to be higher than their costs.

Growth From China

Also, in the second quarter, the negative impact from the decline in Europe and restructurings will be partially offset by growth from the emerging economies, especially China. Auto production and construction spending continues to rise in China, which will support demand for Johnson Controls products. Overall, sales from Asia constitute roughly 20% of the total sales of Johnson Controls. ^[4]

In North America, which constitutes roughly 35% of Johnson Controls sales, auto production had increased by 11% in the previous quarter and is expected to grow in low single-digit percentage range in 2013, compared to 2012, according to Johnson Controls estimates. ^[4] This will help the results of the company. However, the slowdown in the non-residential construction markets of this region will impact sales of the company’s building market products like HVAC systems. Thus, the impact from North America is expected to be mixed.

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1. Johnson Controls quarterly update: FY 2013, first quarter, January 18 2013, www.johnsoncontrols.com [↩] [↩]
2. Johnson Controls Q2 fiscal 2012 10-Q, May 3 2012, www.johnsoncontrols.com [↩]
3. Johnson Controls presentation at Barclays Industrial Select Conference, February 21 2013, www.johnsoncontrols.com [↩]
4. Johnson Controls presentation at Barclays Industrial Select Conference, February 21 2013, www.johnsoncontrols.com [↩] [↩] [↩] [↩] [↩]