Johnson Controls‘ (NYSE:JCI) sales rose by 5% annually to $10.9 billion in the first quarter of its fiscal 2014 on higher global automotive production, partially offset by weak demand from European building markets.  The company’s sales rose sharply in its auto seats and auto batteries segments driven by higher shipments to car manufacturers. However, weak demand from Europe for heating, ventilation and air-conditioning (HVAC) systems due to warmer than usual winter on the continent weighed on sales of Johnson Controls’ building efficiency segment, which makes York brand HVAC systems. The company’s first quarter profits also rose by 33% annually on additional gains from its cost reduction activities. 
Looking ahead, Johnson Controls affirmed its outlook for fiscal 2014, backed by first quarter results which are in line with its expectations. The company currently forecasts its fiscal 2014 earnings to lie between $3.15 per share and $3.30 per share, up from $1.71 per share in fiscal 2013, which ended on September 30, 2013.   The company also expects its margins across all three of its business segments to expand in the current fiscal year on gains from ongoing cost reduction measures.
We currently have a stock price estimate of $48 for Johnson Controls, marginally above its current market price. We are in the process of incorporating the first quarter results in our analysis and shall update the same shortly.
Growth From The Global Auto Sector Lifted First Quarter Results
Automotive industry production in the first quarter rose by 5% annually in North America, 2% annually in Europe and 14% annually in China.  This strong growth in auto production increased shipments of Johnson Controls’ auto seats, auto interiors and auto batteries. The company’s sales from China which are largely related to auto seats and generated through minority-owned joint ventures rose by 33% annually to $1.9 billion in the quarter.  Johnson Controls said that this strong growth from China is a result of fast growth in the country’s auto sector and its own market share gains in the country, driven by its superior product offerings. In all, Johnson Controls’ sales from its auto batteries, auto seats and auto interiors segments rose by around 9% annually in the first quarter.
The company’s profits from its automotive segments rose at a much higher rate driven by additional benefits from its ongoing cost-reduction measures. Around a year-and-half back, Johnson Controls initiated multiple cost reduction activities which included headcount reductions and plant consolidations. These measures lifted the company’s segment profit margins to 7.7% last fiscal, from 6% in fiscal 2012.  In the first quarter of fiscal 2014, gains from these measures continued to expand the company’s margins to lift its profits.
Soft European Building Markets Weigh On Results
On the flip side, Johnson Controls’ growth from its auto segments was offset in part by weaker results from its building efficiency segment where both sales and profits contracted on a year-over-year basis in the first quarter. The segment’s higher revenues from Asia in the quarter were more than offset by weaker demand from Europe. However, going forward, the company anticipates its results from this segment to improve with recovery in the commercial buildings markets of Europe.
Product Portfolio Update
Separately, Johnson Controls reiterated that it is undertaking strategic review of its auto interiors business which makes door, floor and front panels in addition to other car interiors. Earlier in the quarter, the company sold off the remaining units of its auto electronics business to Visteon Corp. for $265 million. We figure the company’s review of its auto interiors business, which contributes about $4 billion a year to its top line, is a step in the right direction as this business has extremely low margins of around 1%.  In our opinion, the company can generate better returns on its investments in its other segments like auto batteries and building efficiency, where its margins are much higher.Notes:
- Johnson Controls fiscal 2014 Q1 earnings form 8-K, January 23 2014, www.johnsoncontrols.com [↩] [↩] [↩] [↩]
- Johnson Controls fiscal 2013 10-K, October 29 2013, www.johnsoncontrols.com [↩] [↩]
- Johnson Controls fiscal 2014 Q1 earnings presentation, January 23 2014, www.johnsoncontrols.com [↩]
- Johnson Controls strategic review and 2014 outlook, December 18 2013, www.johnsoncontrols.com [↩]