Johnson Controls’s Net Rises On Higher Global Automotive Production & Cost Cuts

Johnson Controls (NYSE:JCI) posted healthy growth in its second quarter results as higher global automotive industry production and gains from cost cuts more than offset weakness from commercial heating, ventilation & air-conditioning (HVAC) markets. The company’s revenues rose by 4% annually to $10.5 billion, and its earnings excluding non-recurring items rose by 52% annually to 64 cents a share in the second quarter of its fiscal 2014. ^[1] Higher global automotive production drove growth across the company’s auto segments, namely auto batteries, auto seating and auto interiors, but softness in commercial HVAC markets of both North America and Europe weighed on Johnson Controls’s building efficiency segment which makes York brand air-conditioners. We figure given the mixed demand environment in the company’s key markets, its results will likely post moderate growth in the second half of its fiscal 2014, which ends on September 30.

Separately, Johnson Controls did not make any new announcement related to its auto interiors business, apart from reiterating that the segment remains under strategic review. Earlier, the company divested its auto electronics business and headliner and sun visor product lines of its auto interior business. We figure these divestitures were a result of Johnson Controls’s shift towards higher margin businesses, as these divested units had margins in low single digits. The auto interiors segment which makes door panels, instrument panels and floor consoles also has margins in low single digits, and we figure Johnson Controls could sell more parts of this business in the coming months, in order to focus on its other businesses such as auto batteries and HVAC, that have higher margins and provide higher return on investment.

We currently have a stock price estimate of $50.50 for Johnson Controls, around 15% ahead of its current market price. We are in the process of incorporating the second quarter results and shall update our analysis shortly.

See our complete analysis of Johnson Controls here

[trefis_slideshow ticker=”JCI” rhs=”3″]

Growth From Auto Markets Lift Second Quarter Results

During the quarter, the global automotive industry production rose by 5% each in North America and Europe and by 9% in China. This raised demand for auto seats, auto interiors and auto batteries, pushing up sales at Johnson Controls’s auto segments. Second quarter sales at the company’s auto seating & interiors segment rose by 11% annually to $5.6 billion, while sales at its auto batteries segment were flat at $1.6 billion in the second quarter, compared to the year ago period. ^[2] At the auto battery segment, sales were flat due to lower lead prices which offset higher battery shipments through lower per unit battery prices. However going forward, if lead prices do not fluctuate significantly, we anticipate the segment’s results to rise with growing demand from the global auto makers and aftermarket.

Weak Commercial HVAC Markets Temper Growth

Comparatively, sales at Johnson Controls’s building efficiency segment fell by 5% annually to $3.3 billion in the second quarter due to persistent weakness in the commercial HVAC markets. ^[2] Even as the residential HVAC market in North America has recovered driven by an improving housing market, the commercial HVAC market has remained soft due to weak commercial construction spending. And with Johnson Controls’s York brand HVAC portfolio focused on commercial buildings, the market weakness has weighed on the segment’s results. Johnson Controls anticipates this weakness in commercial HVAC markets to persist through its current fiscal year, and we figure this will temper the company’s growth from its automotive segments in the coming quarter as well.

Additionally, despite a decline in sales, building efficiency segment’s profit rose by 9% annually to $152 million in the second quarter on gains from cost reduction activities. ^[2]

Around a year-and-half back Johnson Controls initiated multiple cost reduction measures to combat a challenging macro environment. At the time, the company was faced with declining construction spending from both Europe and North America. So, from late 2012 through 2013, Johnson Controls among other measures lowered its headcount and consolidated its production facilities to reduce its costs. These measures expanded its segment profit margins to 7.7% in fiscal 2013 from 6% in fiscal 2012. ^[3] As these measures remain underway, they further expanded the company’s margins including its building efficiency segment margins in the first half of fiscal 2014. Going forward, despite anticipated weakness in commercial HVAC markets we figure higher building efficiency segment margins driven by these cost reduction activities could continue to raise the segment’s profits.

See More at Trefis | View Interactive Institutional Research (Powered by Trefis)
Get Trefis Technology

1. Johnson Controls fiscal 2014 Q2 earnings form 8-K, April 23 2014, www.johnsoncontrols.com [↩]
2. Johnson Controls fiscal 2014 Q2 earnings presentation, April 23 2014, www.johnsoncontrols.com [↩] [↩] [↩]
3. Johnson Controls fiscal 2013 10-K, October 29 2013, www.johnsoncontrols.com [↩]