Johnson Controls’ Cost-Cutting Will Propel Earnings Higher Despite A Mixed Macro Environment

Johnson Controls (NYSE:JCI) will announce its fourth quarter (of fiscal 2013) earnings Tuesday, October 29. The maker of auto batteries, auto seats and interiors and York-brand air conditioners will likely post strong growth in its profits on margin expansion driven by cost-cutting measures. In the previous quarter, the company’s earnings rose significantly driven by gains from restructuring initiatives and sequential improvements in its automotive profits from Europe. We anticipate these drivers of third quarter improvement to continue to benefit Johnson Controls’ results in the fourth quarter.

The company guides its fourth quarter earnings, excluding special items to rise 21-23% annually to 93-95 cents a share. ^[1] We currently have a stock price estimate of $40 for Johnson Controls, around 5% below its current market price.

See our complete analysis of Johnson Controls here

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Restructuring Gains To Expand Margins

Around a year back, Johnson Controls was faced with an extremely challenging demand environment with automotive production falling in Europe and remaining weak in North America. Construction spending was also declining from Europe. These trends were impacting results across the company’s segments namely auto batteries, auto interiors and building efficiency, which provides the York-brand air conditioners and other building systems. Faced with such an environment, Johnson Controls initiated extensive restructuring initiatives aimed at lowering its cost structures. These cost-cutting measures included headcount reductions and plant consolidations among others. Last quarter, for the first time, gains from these restructuring initiatives exceeded their one-time costs to lift the company’s profits through margin expansion. In the fourth quarter, we anticipate Johnson Controls to further expand its margins as these initiatives continue through the quarter.

Mixed Macro Environment

Over the past year, the demand environment across many of Johnson Controls’ markets has improved. Automotive production has recovered in North America and continues to post strong growth in China. Automotive production in Europe is also improving gradually and we anticipate the company’s earnings from its European auto business to rise sequentially, though these will likely be lower on a year-over-year basis. Additionally, we expect the company’s results to continue to benefit from its expansion in the emerging markets such as Asia-Pacific.

Progress On Sale Of The Remaining Units Of Auto Electronics Segment

Also, in focus this earnings will be the progress that Johnson Controls has made in selling the remaining units of its auto electronics segment. This segment constituted around $1 billion of the company’s $42 billion revenues last year. ^[2] Johnson Controls recently sold the HomeLink unit of its auto electronics segment to Gentex Corp for around $700 million and reiterated that it was in active conversation with multiple players to sell the remaining units of this segment. ^[3] We figure the decision to exit the auto electronics space is a step in the right direction for Johnson Controls as it was a niche player in this space providing only body electronics, driver information and some other electronics parts. To grow in this space the company would have needed to make significant investments in navigation and other auto electronic technologies. We figure the cash from these sales could be used by the company to bolster its investments aimed at further strengthening its leadership position in the auto battery, seating and interior spaces.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Johnson Controls investor kit presentation, October 26 2013, www.johnsoncontrols.com [↩]
2. Fiscal year 2012′s 10-K, November 19 2012, www.johnsoncontrols.com [↩]
3. Johnson Controls completes sale of HomeLink business, September 27 2013, www.johnsoncontrols.com [↩]