Johnson Controls’ Stock Price Falls On Sales Miss

Johnson Controls (NYSE:JCI) released its third quarter earnings, for the three months ended June 2017, on July 27, wherein it met consensus estimates on earnings, but missed on sales. The diluted EPS of the company came in at $0.71, up 16% over the prior year, while the net sales of $7.67 billion reflected a growth of 1% over the second quarter of the previous year. Organic sales of the company grew at a similar rate, with organic growth of a little over 2% in Buildings being offset by a decline of 2% in Power Solutions. The company was able to deliver significant progress on the Buildings organizational structure, post the merger with Tyco, delivering savings of approximately $80 million, or about $0.07 per share. The company is on track to achieve the higher end of its savings target range of between $250 and $300 million in the year, totaling to roughly $0.27 per share.

Why Did The Stock Fall On The Earnings Announcement?

• Sales Miss- Slower than expected revenue growth resulted in a sales miss of roughly $50 million. Building sales were down marginally to $6.06 billion, from $6.08 in the corresponding prior year quarter. Continued momentum of the global HVAC business was offset by a decline in the Fire and Security business, which fell by low single digits. While the integration with Tyco has resulted in some cross-selling wins, there have also been teething issues, which may have resulted in the orders falling by 4% for Tyco.

• Trimming EPS Guidance- JCI has trimmed the upper end of the range for its forecast for full-year earnings per share, from $2.60 to $2.68 stated in April to $2.60 to $2.62. This is despite the fact that the FX headwinds expected are far lower than what was predicted in April – of $160 million versus $380 million. This has been caused by a slowdown in the organic growth, now expected to increase by 2%, instead of 3%. Such a state of affairs is again caused by the integration of the two companies. The company will continue to offset the revenue shortfall by its productivity gains, which remain on track.

AGM Batteries To Power The Future

• The Power Solutions segment has managed to grow substantially in recent years, driven by a demand for their AGM (Absorbent Glass Mat) batteries, which are used in vehicles with the start-stop technology. Approximately 24% of all batteries sold are paired with this start-stop system.
• The company expects the batteries with the start-stop technology to increase from 24% today to over 60% in 2020.
• A number of factors work in the favor for this 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 environmental regulations.
• These AGM batteries are also able to handle the higher usage that comes along with the new technical features being added to cars.
• The electrical vehicle boom, and the opportunities provided by the Chinese market, make this business poised for substantial growth in the future. According to Ray Shemanski, a vice president of Johnson Controls, about 40% of new vehicles in China will be fitted with the ‘start-stop’ technology by 2020, the same year when the Chinese government requires automakers to further lower the average fuel consumption, from the current 6.9 liters per 100 kilometers to 5 liters per 100 km.
• AGM batteries witnessed 17% growth in the quarter. However, this rate could have been even higher if the capacity had been available to the company.
• Keeping this capacity constraint in mind, JCI has undertaken significant investment to boost the production of these batteries. The company has guided for $1.25 billion to $1.30 billion in capital expenditure this financial year.

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

• Johnson Controls Beats Expectations, Trims Guidance
• Why Did 3M Acquire Johnson Controls’ Scott Safety?
• Will The Merger With Tyco Result In Improved Margins For Johnson Controls?
• Johnson Controls: A Focus On China