Johnson Controls’ Building Efficiency To Grow Despite ABI Decline

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The Architecture Billings Index (ABI), a leading indicator for nonresidential construction activity in the U.S., is an important indicator for Johnson Controls‘ (NYSE:JCI) Building Efficiency segment, since growth in nonresidential construction activity directly impacts the segment’s revenue. In its most recent release, the American Institute of Architects (AIA) reported that the ABI had declined from 52.7 in December to 49.9 in January. [1] We believe that despite the decline, the news will not be a cause for concern for Johnson Controls’ Building Efficiency segment, which manufactures heating, ventilation and air-conditioning (HVAC) equipment.

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Despite ABI Declines, Other Trends Support Growth

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The ABI is derived using a monthly survey conducted by the AIA Economics & Market Research Group, wherein architecture firms report whether billings in the previous month increased, decreased, or remained the same compared to the prior month. If an equal number of firms report an increase and a decrease, then the score for that month is 50. A score above 50 indicates an increase in billings, therefore implying expansion in nonresidential construction activity. The opposite is true for a score below 50, which indicates decline in billings. However, the decline in the ABI in January is most likely an anomaly. This is because other trends still point towards strength in nonresidential construction activity.

Apart from billings, the AIA also reports two other indices, which track new design contracts signed and project inquiries, both of which remained strong. The design contract index increased from 50.2 in December to 51.3 in January while the inquiries index remained strong at 58.7, despite a marginal fall from 59.1 in December. [1]

Strong growth in job additions also point towards a healthy construction sector. Jobs in the construction sector increased 6% year-on-year in 2014. [2] Construction activity has also remained strong in the past few months. In the three months ended January 31, housing starts grew 4% year-on-year. [3] In the two months ended December 31, overall construction spending in the U.S. increased 2% year-on-year. [4]

Broader market indicators also remain strong. For example, consumer sentiments, as tracked by University of Michigan’s Index of Consumer Sentiment, was up 15% year-on-year. [5] Although there was a sequential decline, sentiments are at their highest since January 2007, with real personal consumption expenditures forecast to grow 3% in 2015.

Since the broader economic indicators, as well as construction-specific indicators, point towards a healthy environment, we can expect to see continued growth in Johnson Controls’ Building Efficiency sales.  You may recall that Building Efficiency revenues had been declining for quite some time due to weak commercial HVAC markets in North America. However, the segment’s sales turned around in the first quarter, growing 1%, excluding the contribution from Air Distribution Technologies and foreign exchange. [6]

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Notes:
  1. AIA Architecture Billings Index, www.aia.org [] []
  2. Employment Situation Summary, www.bls.gov []
  3. U.S. Housing Starts, www.ycharts.com []
  4. U.S. Construction Spending, www.ycharts []
  5. Index of Consumer Sentiment, www.sca.isr.umich.edu []
  6. Johnson Controls FY 2015 first quarter Presentation, January 22, 2015, www.johnsoncontrols.com []