Will The Merger With Tyco Result In Improved Margins For Johnson Controls?

Johnson Controls (NYSE:JCI) is scheduled to report its first quarter earnings of FY 2017 on February 1. This will be the first quarter wherein the company will report consolidated earnings, which includes those of Tyco International, giving investors the chance to see the progress of its integration.

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Key Developments:

• Tyco Merger

The management, at the time of the merger, identified massive benefits as a result of the merger, slated to be more than $1 billion, with $500 million in operational synergies, $150 million in tax synergies, $300 million as a result of productivity initiatives in Johnson Controls, and another $100 million from such initiatives in Tyco. During its recent analyst day meeting, the company revised this figure upwards to $1.2 billion. The management also forecast the effects of synergies and productivity to account for $0.03 in the EPS. In the long term, it will translate to approximately $1.10 in the EPS through fiscal 2020.

Despite these known benefits, the investors have not taken to the stock, with the price being lower than when the merger occurred. This is in spite of the fact that the share prices of industrial stocks have risen after the election of Donald Trump as President of the United States. Hence, once the earnings show the results of the company’s transformation activities, and whether the company has succeeded in obtaining additional cost reductions, restructuring savings, and operational efficiencies, it is possible that it will be reflected in the stock price.

Furthermore, with the spin-off of the company’s automotive seating and interiors business as Adient, Johnson Controls has been able to exit its low-margin segment, and can instead focus on its less cyclical, higher margin businesses, which are experiencing greater levels of growth. This should further aid in improving the margins.

• China Opportunity For AGM Batteries

Johnson Controls announced plans to invest $445 million to boost the output of its Absorbent Glass Mat (AGM) batteries. These are technologically advanced car batteries that are more expensive than conventional lead acid batteries, but are better equipped to handle the strain of frequent engine restarts and the ever-increasing load placed on car batteries. They are employed in vehicles with the start-stop technology, which, while being fuel-saving, can tax a car battery since the electrical system still uses the energy from the battery when the vehicle turns off. Of the investment, $245 million will be expended to double its battery output in North America by investing in existing plants, and $200 million will go towards building a new battery plant in China. JCI also stated that it plans to invest a total of $780 million globally by 2020 to increase the production of these batteries.

JCI considers the growth opportunity in China to be attractive, and the new joint venture with Binzhou Bohai Piston Co., an auto parts affiliate of Beijing Automotive Industry Group Co. (BAIC Group) to build its fourth automotive battery plant in China, will position the company to take advantage of the market opportunity, as China is expected to be the largest automotive battery market in the world by 2020. The fuel savings with the start-stop technology is one of the main drivers for its increased adoption. Under average driving conditions, savings amount to 3% to 5%. However, with a high number of stops and with traffic lights staying red for extended periods, the figure can rise to 10%, according to Robert Fascetti, vice president for powertrains at Ford. Car manufacturers are also under intense pressure to meet strict fuel economy standards by 2025, and with the increased fuel efficiency of AGM batteries, this technology is destined to be in a majority of cars in the next few years.

Currently, this technology is present in between 5% and 10% of the Chinese market. This figure is expected to rise to 50% during the next five years, according to Alex Molinaroli, CEO of Johnson Controls. 50% would imply about 15 million new vehicles that will be equipped with start-stop functionality in China, saving an estimated 1.2 billion liters of gasoline per year. It also reduces greenhouse gas emissions by 2.8 million metric tons per year. This is also key, as the increasing regulatory trends have been putting pressure on automotive manufacturers to reduce their carbon emissions. A number of factors work in the favor of this AGM technology. As stated by Lisa Bahash, group vice president and general manager Original Equipment of Johnson Controls, strong growth is expected from this technology as it requires minimal changes to the vehicles, and costs considerably less than battery systems in hybrid or electric cars. It is also the best solution to aid automotive manufacturers to meet regulatory targets. Another factor precipitating a rise in battery demand is the aging of cars in China. Ray Shemanski, a vice president of Johnson Controls, believes about 67% of vehicles would have been in use for more than four years in 2020, a typical age necessitating battery replacement.

Have more questions on Johnson Controls? See the links below:

• What Trends Will Ensure Growth For Johnson Controls In The Future?
• Adient To Rely On China For Growth In The Future
• Johnson Controls Powers Through Its Financial Year 2016
• How Will Johnson Controls Perform In Its Fourth Quarter?
• How Is Johnson Controls’ Power Solutions Business Expected To Grow In The Next Five Years?
• How Is Adient Expected To Perform In The Next Year?
• Why Has Johnson Controls’ Stock Price Appreciated 29% This Year?
• What Drivers Will Ensure Growth For Adient In The Future?
• What Is Adient’s Position In The Global Automotive Seating Market?
• How Has Adient Performed For Johnson Controls?
• How Can Increasing Interest In Energy Efficiency Help Johnson Controls?
• How Did Johnson Controls Fare In Q3 2016?
• How Will Johnson Controls Perform In Q3 2016?
• Why Is Johnson Controls Banking On China For Its Absorbent Glass Mat Batteries?
• Why Is Johnson Controls Increasing The Production Of Its Absorbent Glass Mat (AGM) Batteries?
• What Are The Prospects For Johnson Controls’ Power Solutions Business?
• What Will Be The Effect On The Segment Operating Margin As A Result Of The Johnson Controls-Tyco Merger?
• What Are The Benefits Johnson Controls Will Attain From The Tyco Merger?
• Will The U.S. Treasury Department Rules, That Killed The Pfizer-Allergan Deal, Affect Johnson Controls-Tyco Merger?
• Johnson Controls’ Earnings Beats Expectations
• Will Johnson Controls Miss Estimates Again?
• How Has Johnson Controls’ Net Sales Changed By Geographic Areas?
• How Does The Adient Spin-Off And Tyco Merger Create Value For Johnson Controls’ and Tyco’s Shareholders?

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