Johnson Controls (NYSE:JCI) forecast moderate growth in sales and earnings in fiscal 2014 at its recent investor meeting. Although the company anticipates its end markets to stabilize in 2014 (including its automobile and commercial construction markets in Europe), it guided its revenues to grow at a modest rate of 3% year-over-year to $43.8 billion in fiscal 2014.  The company cited weak demand from battery aftermarkets in North America and Europe, among other factors, which could temper its growth in the coming year.
In our opinion, Johnson Controls’ results in 2014 will be driven by gains from restructuring activities and capacity expansion in the emerging markets, particularly China. We currently have a stock price estimate of $48 for the company, around 5% below its current market price.
Restructuring Activities Will Likely Expand Margins In 2014
Around a year and a half ago, Johnson Controls was faced with an extremely challenging macro environment, with automotive production and construction spending falling in Europe and remaining weak in North America. As the company generated more than three-fourth of its sales from these regions, results across the company’s segments — auto interiors, auto batteries and building efficiency, which makes York-brand air conditioners — were severely impacted. Faced with weak demand, Johnson Controls initiated extensive restructuring activities last year to lower its costs. These activities included plant consolidations and headcount reductions, among others. These measures expanded the company’s segment profit margin to 7.7% in fiscal 2013, which ended on September 30, from 6% in fiscal 2012. 
We figure that Johnson Controls’ margins will likely continue to expand in fiscal 2014 to lift its profits as the restructuring initiatives remain underway.
Capacity Expansion In Emerging Markets Will Drive Top Line Growth In 2014
At the same time, the company plans to continue to expand in emerging countries, particularly China, to occupy a larger share of the fast growing building and automobile markets in these countries. Johnson Controls anticipates non-residential construction spending from Asia to rise in double-digits in 2014, driving up demand for its heating, ventilation and air-conditioning (HVAC) and other building products. The company also anticipates automotive production in China will rise by 11% annually in fiscal 2014, growing demand for its auto batteries and interiors like seats and door/floor/front panels.  For its part, Johnson Controls is investing in China to grow its production capacity of both conventional lead-acid auto batteries and absorbent glass mat (AGM) batteries, which power start-stop vehicles. The company is also opening new plants in China that will cater to the auto interior and seat markets of the country. Last fiscal year, Johnson Controls’ sales from China, including those from its non-consolidated joint ventures in the country, grew to $7.2 billion. By 2018, driven by sustained capacity expansion in the country, the company anticipates this figure to rise to around $12.5 billion. 
Additionally, we believe Johnson Controls’ growth in 2014 from these major trends will be supported by the stabilization in auto and commercial construction markets in Europe . The company believes that the European market is bottoming out and that commercial construction spending as well as automotive production from the region will grow by 2% annually in the coming year. 
In all, gains from capacity expansion in the emerging markets and stabilization in Europe will be key to accelerating growth in Johnson Controls’ top line to 3% annually in fiscal 2014, from 1.8% year-over-year growth seen in fiscal 2013. Notes: