Johnson Controls' Strategies Impress, Projects Solid FY15 - Analyst Blog

Johnson Controls Inc. (JCI) has projected better results for fiscal 2015 based on higher profitability in all three businesses. The company believes that its strategic and financial plans will lead to better performance and higher operating margins.

Johnson Controls anticipates significant growth opportunities in China, which generated more than $8 billion of annual revenues in fiscal 2014. As a result, the company will be investing in the Chinese market this year. Johnson Controls has also started the construction of a new Asia Pacific headquarters building in Shanghai.  

Johnson Controls expects earnings per share in the band of $3.55 to $3.70 for fiscal 2015, compared with $3.18 per share earned in fiscal 2014. Revenues are likely to be $42.3 billion in the year compared to $42.8 billion recorded in fiscal 2014.

Revenues will benefit from the improvement in results in the Building Efficiency and Power Solutions segments. Revenues will have a favorable impact from higher automotive production in all its locations compared to the 2014 level, with a 10% improvement in China, 2% in North America and 2% in Europe.

Segment Outlook

Revenues in the Automotive Seating segment are estimated to fall 5% to 6% in fiscal 2015, based on lower investments in mature markets, new financial performance hurdles and foreign currency headwinds. Chinese business results are not incorporated in the revenue guidance. Automotive Interiors sales should decline in fiscal 2015.

The Automotive Seating segment's margins are projected to increase by 5.4% to 5.7%, driven by operational improvements in the metals business and strong performance by the company's Chinese joint ventures.

Revenues from the Building Efficiency segment, excluding Global Workplace Solutions (“GWS”), are estimated to increase 9% to 11% in 2015 due to growth in the emerging markets and North America. Excluding the impact of the acquisition of Air Distribution Technologies (“ADT”) in 2014, sales are expected to rise 2% to 4%. Segment margins are forecasted to rise to 9.4–9.6%, due to operating model changes, pricing initiatives and improved profitability in the Middle East. Revenues from GWS will be at par with the fiscal 2014 level and margins will improve 3.2% to 3.5%.

Revenues from the Power Solutions segment are expected to climb 8% to 10%, due to expanding volumes in all regions with higher market share growth in China. Increased production of Absorbent Glass Mat (“AGM”) batteries will also benefit the results. Segment margins should be around 16.5% to 16.7% due to higher volumes, improved mix, higher profitability in China and operational improvements, partially offset by investments in advanced battery technologies and capacity expansions in China.   

Johnson Controls plans capital expenditures of $1.3 billion in fiscal 2015, which is $100 million higher than the fiscal 2014 level. The company predicts free cash flow generation of about $1.5 billion, which will provide opportunities for future capital expenditures, strategic acquisitions, share repurchases and dividend payouts.
 
Mid-to-Long Term Outlook

Till fiscal 2019, Johnson Controls expects revenues from the Automotive Seating segment to increase 2% to 3% annually driven by higher global production volumes partially offset by the impacts of lower capital investments in the business and new financial performance hurdles. The company predicts margins to expand an average of 50 to 60 basis points annually to about 7% to 8% by fiscal 2019.

Johnson Controls expects revenues from the Building Efficiency segment, excluding GWS, to rise 6% to 7% annually till fiscal 2019, on the back of recovery in global construction markets and gain from the ADT acquisition. The company forecasts margins, excluding GWS, to reach 11% to 12% due to higher volumes, pricing initiatives and supply chain improvements.

Johnson Controls expects revenues from the Power Solutions segment to rise 5% to 6% per annum till fiscal 2019, due to growth in China and improved product mix together with gain in market share. The company projects margin expansion of 50 basis points per annum to 18–19% by fiscal 2019.

Johnson Controls is a supplier of automotive interiors, batteries and other control equipment. It is a leader in the supply of HVAC, building controls, refrigeration and security systems for buildings. The company currently holds a Zacks Rank #4 (Sell).

Better-ranked automobile stocks worth considering include Gentex Corp. (GNTX), STRATTEC Security Corp. (STRT) and Meritor, Inc. (MTOR). Both Gentex and STRATTEC Security sport a Zacks Rank #1 (Strong Buy), while Meritor carries a Zacks Rank #2 (Buy).

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