Susquehanna ID's 5 Negatives In Johnson Controls

Johnson Controls International plc Ordinary Share JCI released its fiscal fourth quarter results Nov. 9, which revealed in-line bottom line results and 4 percent adjusted sales growth.

The company's fiscal 2018 adjusted earnings per share guidance fell below the Street estimate.

It's worthwhile to note that Johnson Controls closed on its acquisition of Tyco in September 2016.

The Analyst 

Susquehanna Financial Group analyst Robert Barry downgraded shares of Johnson Controls from Positive to Neutral and lowered the price target from $48 to $40. The downgrade is based on a weaker earnings growth outlook and a less apparent upside to multiples, the analyst said. (See Barry's track record here.)

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The Thesis

Barry outlined the five new negatives he said have become apparent in the wake of fourth quarter results: 

• Weaker pricing/cost and higher investment spending has magnified the risk to margins.
• Several one-time items are casting a cloud over an anticipated improvement in adjusted free cash flow, with a total impact estimated at $800-900 million. Johnson Controls could also experience further pressure on joint venture dividend payments and pension contributions, Barry said. The "noisy, pressured all-in FCF" erodes confidence in the integrity of the company's financials, the analyst said. 
• A weaker end market renders the growth outlook for the company's Power business weak.
• The new segmentation is confusing, rather than clarifying, given the limited history and lac of a sub-segment forecast.
• The new incentive program is expected to cause selling-related disruptions, Barry said. 

"Any multiple expansion story could be sizable with shares at 13x F18 vs. the industrial average of 20x, but timing increasingly looks protracted, and we'd rather cede some early upside to wait for signs of clear progress on key financial metrics," the analyst said. 

The Price Action

Johnson Control stock is down 16 percent year-to-date.

At last check, Johnson Controls shares were sliding 3.62 percent to $34.59.

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