Johnson Controls (NYSE:JCI) will announce the third quarter results of its fiscal 2014 Friday, July 18. The maker of auto batteries, auto seats, and building cooling and heating systems is coming off a good first half, in which its revenues and earnings rose strongly on higher global automotive production and gains from cost cutbacks.
In the third quarter, we anticipate the trend the continue. The company will likely post healthy growth in its third quarter top line on continued growth from global automotive production, partially offset by weakness from the commercial heating, ventilation and air-conditioning (HVAC) markets of North America and Europe. Johnson Controls’ third quarter profits will likely also rise on savings realized from cost reduction activities.
We currently have a stock price estimate of $51 for Johnson Controls, approximately in line with its current market price.
Growth from the Global Auto Sector Will Lift Johnson Controls’s Q3 Top Line
In its outlook for fiscal 2014, Johnson Controls forecast automotive industry production to rise across all major markets including North America, China and Europe.  In the first half, this turned out to be the case, and in the third quarter, we anticipate the trend to continue. The company through its auto batteries and auto seat segments generates more than half of its revenues from the global automotive sector. The rising production in the global automotive industry will likely play a key role in driving top line growth in Johnson Controls’s third quarter results.
Soft Commercial HVAC Markets Will Temper Top Line Growth
Compared with growth from the global auto sector, the company’s third quarter results will likely be impacted by weak commercial HVAC markets in North America and Europe. 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’ York brand HVAC portfolio focused on commercial buildings, the ongoing market weakness will likely weigh on the segment’s third quarter results. During its last quarter’s earnings presentation, Johnson Controls had said that it anticipates the weakness in the commercial HVAC market to persist through the current fiscal year. So in our view, the revenue growth in Johnson Controls’ third quarter results from higher global automotive production, will likely be tempered by weakness from global commercial HVAC markets.
Savings from Cost Cuts Will Spur Profit Growth
Additionally, despite moderate top line growth, we anticipate the company’s profits to grow strongly in the third quarter on additional gains from cost reduction activities. 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 facing declining construction spending and automotive production in Europe, and weak growth in North America. 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 the company’s segment profit margin to 7.7% in fiscal 2013, from 6% in fiscal 2012.  The company’s margin rose further in the first half of fiscal 2014 on gains from these cost reduction measures. And as these cost cuts remain underway currently, we anticipate Johnson Controls’ margin to expand further in the third quarter, growing its profits.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 [↩]