Johnson Controls Posts Average Growth In Q3 But Cuts Outlook

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Johnson Controls

Johnson Controls (NYSE:JCI) announced its third quarter results for the fiscal year 2012 on July 19. As anticipated by us and indicated in an earlier article, the company posted average revenue growth on a year-over-year basis as growth from Asia was offset by the slowdown in Europe. However, its stock declined nearly 8% by the end of the day due to a cut in growth outlook for the fourth quarter by the company.

The company posted revenues of $10.6 billion for the third quarter, up 2% from $10.4 billion in the year-ago period. [1] Net income stood at $441 million, excluding non-recurring items, up 15% from $383 million in third quarter of fiscal year 2011. The company had earlier indicated a 20% rise in earnings per diluted share for the third quarter on a year-over-year basis, but could achieve 17% growth on the same on account of continuing weakness in European economic environment whose effect was compounded by a weaker euro.

See our complete analysis for the company here

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Europe offsets growth provided by Asia and North America

In the Building Efficiency business division revenues decreased 2%, as the decline in sales from Europe more than offset sales growth provided by Asia and higher sales of HVAC systems in North America due to record high temperatures in summer. The division manufactures and services heating, ventilation and air-conditioning (HVAC) systems for buildings.

In the automotive interiors business division, sales increased 7% to $5.5 billion from $5.1 billion, year-over-year, driven by higher production volumes in Asia and North America offset by lower volumes in Europe. North American automotive revenues increased 31% to $2.3 billion from $1.8 billion last year. Sales from Asia in the division increased 24% to $679 million from $546 million in 2011. But, sales from Europe were down 12% to $2.5 billion from $2.8 billion in the 2011 quarter. Divisional net income increased to $202 million up 18% from $171 million in the prior year, on the back of doubling of earnings in North America and 67% rise in Asia, offset by $37 million loss in Europe.

In automotive batteries business division, sales decreased 3% to $1.3 billion as demand for batteries from original equipment manufacturers in Europe dropped. Profit margins for the division were also impacted from higher costs of spent battery cores that company acquires for recycling. The prices were driven by lower volumes of aftermarket battery sales during previous quarters that translated in to lower volumes of spent batteries being returned, reducing the overall supply.

Company cuts growth outlook for fourth quarter

The company also lowered its growth forecast for the fourth quarter to 0% – 5% from earlier indicated double digit growth. This we believe is justified in the wake of continuing slowdown in Europe along side a weaker euro.

However, we also believe that even though the company has a tough business environment to navigate over the coming months, its long-term growth factors are still intact as it continues to increase presence in rising economies of Asia, particularly China.

We currently have price estimate of $33.50 for the company that takes in to account these long-term growth factors along with short-term concerns.

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Notes:
  1. Johnson Controls reports double-digit increase in earnings on slightly higher Q3 2012 revenues, July 19 2012, www.johnsoncontrols.com []