Johnson Controls’ Earnings Can Motor Higher On Emerging Markets Expansion

by Trefis Team
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    Quick Take
  • Johnson Controls will announce third quarter earnings of fiscal 2013 on Thursday, July 18.
  • The company is expected to post higher year-over-year results driven by growing footprint in the fast growing developing markets, particularly China.
  • The ramp up of a South Carolina lead recycling facility and savings from restructuring activities will also aid profits of the company in the third quarter.
  • On the flip side, decline from Europe due to its continuing economic slowdown will likely offset in part the growth from Asia and North America.

Over the last few quarters, Johnson Controls (NYSE:JCI) has battled a mixed global macro environment with growth from higher construction spending and automotive production in Asia especially China being offset by a decline from Europe. However, in the third quarter of fiscal 2013, with continued sequential improvement in Europe the company anticipates to post higher year-over-year results.

In particular, the focus on expansion in China, benefits from restructuring initiatives and full ramp up of the South Carolina lead recycling facility will likely grow Johnson Controls third quarter profits. The company indicated that it is comfortable with analysts expectations of $0.75 per share for its third quarter earnings. For full fiscal 2013, Johnson Controls guides its earnings to lie between $2.60 and $2.70 per share. [1]

We currently have a stock price estimate of $33 for Johnson Controls, around 10% below its current market price.

See our complete analysis of Johnson Controls here

Expanding Presence In Key Emerging Markets

Currently, more than three-fourth of Johnson Controls’ sales are generated from the relatively slow growing markets of Europe and North America. However, the company is aggressively investing in the fast growing emerging markets including China and India to grow their share in its total sales that will lift its overall growth. Earlier this year in May, Johnson Controls bought out its local partner in India from a venture that sells car seats and other automobile components to the Indian automobile industry. (See Johnson Controls Bets On Indian Growth And Buys Out Local Partner)

In China, the company continues to expand its footprint across its businesses that include automotive seating, auto interiors, auto batteries and building efficiency, which sells mechanical and heating, ventilation and air-conditioning (HVAC) systems to both commercial and residential markets.

In the auto batteries segment, Johnson Controls is planning to build two more lead-acid battery manufacturing facilities in China to add to its existing three facilities in the country with an objective to increase its total lead-acid manufacturing capacity in the country to 30 million by 2017. [2] In comparison, the company had manufactured 135 million lead-acid batteries worldwide last year. [3]

In the building efficiency segment, the company is expanding its product offerings in China and its distribution network in the country to take advantage of the continued high construction spending from this market. According to industry data cited by Johnson Controls, by 2025, around 350 million additional Chinese are expected to migrate from rural areas to cities. Over this time frame, 50,000 new high rises equivalent to ten Manhattan Islands are expected to be built in the country. [1] As a result of this high construction spending, revenues of Johnson Controls from its building market related products – HVAC equipment, energy efficiency service solutions etc. – are continuing to rise from China.

In the auto seating and interiors segment, Johnson Controls is bolstering its market leading position in China. Currently, the company has 56 plants across 25 locations in the country and it is planning to set up 10 more plants that will manufacture automotive seats and interiors like visors, floor consoles, overhead, door and instrument panels. [1]

In the third quarter earnings, we anticipate that Johnson Controls will grow its overall sales and profits on benefits from these ongoing investments in China and other emerging markets.

Vertical Integration In Auto Battery Business

In addition, third quarter profits of the company will also benefit from full ramp up of the lead recycling facility at South Carolina that was opened in September last year. This facility of Johnson Controls can recycle up to 14 million auto batteries in a year and usage of recycled lead in manufacture of new batteries will help the company grow its margins as well as protect itself to a large extent from fluctuations in lead prices. [4]

Savings From Restructuring

Profit growth will also be aided by cost savings accruing from restructuring activities that were initiated in the fourth quarter of fiscal 2012. Last year, in response to the challenging global business environment the company had initiated several cost saving measures like headcount reductions and plant consolidations. Savings from these measures are expected to exceed their costs for the first time in the third quarter which will aid profit growth.

European Slowdown And Sale of Auto Electronics Segment

On the flip side, despite sequential improvement in Europe, Johnson Controls results from the continent are expected to decline on a year-over-year basis in the third quarter. Europe constitutes around a third of the company’s total sales, and taking this in to account, we anticipate the decline from the region to offset in part the growth from emerging markets and benefits arising from the lead recycling facility and restructuring initiatives.

Separately, Johnson Controls has been looking for a buyer for its automotive electronics business, which constituted around $1 billion of its $42 billion revenues in 2012. [3] The company is a niche player in the global auto electronics business, and in order to grow in this space, it needs to make capital investments in navigation and other auto electronic technologies. We will be looking at the progress the company has made on this front as cash from this sale could be used by the company to further bolster its investments and expansion in the fast growing developing markets.

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Notes:
  1. Johnson Controls investor kit, July 11 2013, www.johnconcontrols.com [] [] []
  2. Johnson Controls China fact sheet, June 12 2013, www.johnsoncontrols.com []
  3. Fiscal year 2012′s 10-K, November 19 2012, www.johnsoncontrols.com [] []
  4. Johnson Controls opens automotive battery recycling facility in Florence, South Carolina, September 18 2012, www.johnsoncontrols.com []
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