Johnson Controls Pre-Earnings: Weak Europe Could Offset Gains From Asia

by Trefis Team
Johnson Controls
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Johnson Controls (NYSE:JCI) will announce first quarter earnings of fiscal 2013 Friday, January 18. The company provides automotive batteries and interiors and has benefited from rising automotive production in Asia and North America. But declining automotive production in Europe, which constitutes around 40% of total sales has strained gains from Asia and North America. [1]

Additionally, the growing construction industry in Asia-Pacific, particularly China has driven growth in heating, ventilation and air-conditioning (HVAC), and real estate service businesses of Johnson Controls. But weakness in non-residential construction spending in Europe and North America, has impacted growth from Asia in the building-related businesses of the company.

In all, Johnson Controls faces tough first quarter earnings with slowdown in Europe, threatening to offset growth provided by Asia and North America. Additionally, restructuring activities which were initiated by the company in the fourth quarter of fiscal 2012, will also pressure earnings by raising costs.

We currently have a stock price estimate of $30.36 for Johnson Controls, approximately 5% below its current market price.

See our complete analysis of Johnson Controls here

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Rising Automotive Production In Asia And North America

The rising automotive production in Asia led by China is raising demand for automotive batteries and automotive interiors. Johnson Controls serves this market by providing a variety of automotive batteries like lead-acid for traditional gasoline-powered vehicles, AGM (Absorbent Glass Mat) for start-stop vehicles and Li-ion for hybrid and electric vehicles. It serves the automotive interior market by providing seats, electronic systems, floor consoles, and door and front panels. With high quality products and aggressive marketing, the company is positioned as a leading player in most automotive markets of Asia. For instance, in the automotive seating market in China, Johnson Controls occupies top position with 44% market share. [2] Thus, the growing automobile industry in Asia is driving growth for Johnson Controls’ automotive businesses.

Along with Asia, the recovering automotive production in North America is also adding to this growth. In the first quarter of fiscal 2013, higher automotive production in Asia and North America will drive sales growth of the company.

Growing Share Of Start-Stop Batteries

Another trend that is adding to sales growth of Johnson Controls’ automotive businesses, is the growing share of start-stop vehicles. This is raising the share of relatively higher priced AGM batteries which power these vehicles. Johnson Controls anticipates that by 2016, up to 40% of vehicles produced in the U.S. will be start-stop. [3] In the first quarter, this trend will contribute to sales growth.

Increasing Construction Spending In Asia

Further, rising construction spending in Asia is also driving sales for building-related businesses of the company. The company provides HVAC systems, energy and operational management services for commercial buildings. This will add to sales growth of the company in the first quarter.

Slowdown In Europe To Impact Sales And Earnings

However, growth provided by Asia in building and automotive segments and by North America in the automotive segment, could be overshadowed by declining automotive production and construction spending in Europe. Additionally, Asia constitutes around 15%, North America around 40% and Europe around 40% of the total sales of Johnson Controls. [1]

The sovereign debt crisis of Europe, impacted sales and earnings of Johnson Controls in fiscal 2012. In the automotive interiors segment of the company, sales from Europe declined 3% year-over-year to $9.9 billion, posting a loss of $52 million from the region in fiscal 2012, compared to a profit of $116 million in fiscal 2011. [4] Also, sales and earnings from Europe declined in the automotive battery segment and building-related businesses of the company in fiscal 2012. In the first quarter of fiscal 2013, we anticipate the trend to continue due to persisting slowdown in business activity in the region.

Restructuring Activities To Also Impact Earnings

Johnson Controls also initiated restructuring activities in the fourth quarter of fiscal 2012, to better align its resources with growth markets and to reduce its cost structures. These restructuring activities, which include workforce reductions and plant consolidations, will incur one-time charges and thus impact earnings in the first quarter.

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  1. Fiscal 2012 10-K, November 19 2012, [] []
  2. Johnson Controls China Fact Sheet, January 15 2013, []
  3. Johnson Controls brings its best-in-class AGM battery technology to North America, July 12 2012, []
  4. fiscal 2012 10-K, November 19 2012, []
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