Non-residential Construction Spending and Automotive Production Will Likely Lift Johnson Controls’s Earnings

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Johnson Controls (NYSE:JCI) is set to release its fourth quarter fiscal year 2014 results on Thursday, October 30, 2014. The maker of auto batteries, auto seats, and building cooling and heating systems witnessed a good first half, in which its revenues and earnings rose strongly on higher global automotive production and gains from cost cutbacks, partially offset by weakness from the commercial heating, ventilation and air-conditioning (HVAC) markets of North America and Europe. The trend continued to drive revenue in the third quarter, but earnings were dampened by one-time costs primarily related to changes in the company’s business portfolio.

In the fourth quarter, we expect to see the company post healthy growth in sales of its automotive seating and batteries. Johnson Controls’ Building Efficiency segment may benefit from the slight uptick in non-residential spending.

Revisiting the third quarter 2014

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Johnson Controls’ earnings fell by 68% annually to 26 cents per share in the third quarter as restructuring and other one-time costs more than offset the moderate increase in the company’s top line. [1] The company also sold its headliner and sun visor product lines during the quarter. Transaction related costs and losses from these divested businesses imposed $140 million in one-time costs on the company in the third quarter. Johnson Controls also spun-off its auto interior business during the quarter through a joint venture with a Chinese company. Restructuring related to this development imposed another $162 million in one-time costs on the company in the third quarter. [2] As a result, Johnson Controls’ third quarter earnings sank. However, excluding these one-time items, the company’s earnings rose by 17% annually to 84 cents per share on higher global automotive industry production. [2]

See our complete analysis of Johnson Controls here

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Weak Commercial HVAC Markets may turnaround

A large part of Johnson Controls’ Building Efficiency segment is exposed to healthcare and educational construction spending, and government spending in the non-residential construction sector in the U.S. Spending in these sectors continued to decline in 2014, affecting Johnson Controls Building Efficiency segment. In the nine months ended June 30, Johnson Controls’ Building Efficiency revenues declined 4.4%. [2]

However, there have been some signs of improvement in the U.S. non-residential spending which may have a positive impact on Johnson Controls’ fourth quarter Building Efficiency revenues. In July and August 2014, seasonally adjusted government non-residential construction spending grew 2.1% and 2.3% year-on-year in July and August respectively. [3] Also, declines in healthcare and educational construction spending have moderated from what was seen in the beginning of the year. However, construction spending in these sectors has declined quarter-on-quarter in August, which does raise some concern.

Johnson Controls’ acquisition of Air Distribution Technologies (ADT), one of the largest providers of air distribution and ventilation products for buildings in North America, should add to its Building Efficiency revenues in the fourth quarter.

Johnson Controls’ recently announced that it is looking to sell off its facilities management business unit, Global Workplace Solutions, which is a part of its Building Efficiency segment. [4] In the fourth quarter results, we will look for any new information related to the company’s ongoing review of its Global Workplace Solutions.

Growth from the Global Auto Sector Will Lift Johnson Controls’s revenue

In its outlook for fiscal 2014, Johnson Controls forecast automotive industry production to rise across all major markets including North America, China and Europe. [5] In the first nine months of the fiscal year 2014, this turned out to be the case, and in the fourth 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 fourth quarter results.

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Notes:
  1. Johnson Controls’ F2014 Q3 earnings form 8-K, July 19 2014, www.johnsoncontrols.com []
  2. Johnson Controls’s F2014 Q3 earnings form 8-K, July 19 2014, www.johnsoncontrols.com [] [] []
  3. U.S. Construction Spending Monthly and Annual Data, www.census.gov []
  4. Johnson Controls announces its intention to divest its Global Workplace Solutions business, September 30, 2014, www.johnsoncontrols.com []
  5. Johnson Controls strategic review and 2014 outlook, December 18 2013, www.johnsoncontrols.com []