Johnson Controls (NYSE:JCI) will announce first quarter earnings of its fiscal 2014 Thursday, January 23. The maker of auto batteries, auto seats and York brand air conditioners will likely post higher revenues driven by growing footprint in the fast growing emerging markets of the world like China. The company’s first quarter profits in addition to gains from top line growth will benefit from higher margins driven by cost reduction initiatives. In all, Johnson Controls will likely post a good first quarter.
We currently have a stock price estimate of $48 for Johnson Controls, around 5% below its current market price.
Capacity Expansion In The Emerging Markets Will Lift Top Line Growth
Johnson Controls continues to expand in the fast growing emerging markets such as China across its businesses, namely auto batteries, auto interiors and building efficiency, which makes heating, ventilation and air conditioning (HVAC) systems. In its auto interiors segment, the company is opening new plants in China that manufacture auto seats and other car interiors like door/floor/front panels. In its auto batteries segment, Johnson Controls is expanding its production capacity in China for conventional lead acid batteries as well as advanced batteries that power start-stop vehicles. Through this expanded presence, the company is seeking to grow its market share in the Chinese auto market where auto production is expected to grow by 11% annually in fiscal 2014.  We figure this ongoing expansion in China and other emerging markets will lift growth in Johnson Controls’ top line in the first quarter.
However, high growth from China and other emerging markets will likely be moderated by low growth from Europe. Last fiscal year, Johnson Controls’ top line grew by slightly under 2% annually, as slowdown in Europe weighed on growth.  In the first quarter, though construction spending and automobile production is expected to grow slightly from Europe, overall, the company’s growth from the region will work to moderate its growth from the emerging regions and the U.S.
Margin Expansion Driven By Restructuring Gains Will Lift Profits At A Higher Rate
In comparison, we figure Johnson Controls’ profits will grow at a higher rate in the first quarter as additional gains from cost reduction initiatives will expand its margins. The company initiated large scale restructuring activities around a year-and-half back to lower its cost structures. At the time, it was faced with an extremely challenging macro environment, with auto production and construction spending falling in Europe and remaining weak in North America. As these regions constituted more than three-fourth of Johnson Controls’ total revenues, weakness in these markets impacted results across its segments. The company reduced its headcount and consolidated plants in an attempt to slash costs. Consequently, its segment profit margins improved to 7.7% in fiscal 2013, which ended on September 30, 2013, from 6% in fiscal 2012.  We figure as these cost reduction initiatives remain underway, they will continue to expand margins and lift Johnson Controls’ profits in the first quarter.
Portfolio Updates In Focus
Also in focus in the first quarter earnings will be the progress that Johnson Controls reports on divestiture of the remaining units of its auto electronics segment. In September last year, the company sold off the Homelink unit of its auto electronics segment to Gentex Corp for $700 million.  Prior to this divestiture, auto electronics segment constituted around $1 billion of the company’s $42 billion revenues. We stated earlier that this exit from auto electronics business is good for Johnson Controls as it is a niche player in the market and in order to grow in this space it will need to make large capital investments in navigation and other electronic technologies. Instead, we figure the company is better off using that capital in bolstering its position in auto battery, auto seats and HVAC markets where it holds dominant positions.
Additionally, at its 2014 outlook meet held last month, Johnson Controls mentioned that it is undertaking strategic review of its auto interiors business which makes door/floor/front panels, among other interiors for cars. The company suggested that this business which contributes around $4 billion a year to its top line is an extremely low margin business. In fiscal 2014, margins for the auto interior segment are expected at around 1-1.2%, compared to over 16% for auto batteries segment.  Thus, we will also focus on any announcements related to strategic review of the company’s auto interiors business.Notes:
- Johnson Controls strategic review and 2014 outlook, December 18 2013, www.johnsoncontrols.com [↩] [↩]
- Johnson Controls fiscal 2013 10-K, October 29 2013, www.johnsoncontrols.com [↩] [↩]
- Johnson Controls completes sale of HomeLink business, September 27 2013, www.johnsoncontrols.com [↩]