Ready to turn the corner?

Johnson Controls trims costs and beats on earnings

By Jim J. Jubak Oct 27, 2009 4:23PM

Jim JubakYou certainly can't say that Johnson Controls (JCI) has turned the corner. But it does look like the corner is in sight.

Before the market opened on Tuesday, Johnson Controls reported earnings of 52 cents a share for the company's fiscal fourth quarter of 2009. That beat the Wall Street consensus by a penny a share.

The problem is, that came from more successful than expected cost-cutting rather than from increases in sales. Even though it came in $40 million above analyst projections, revenue, in fact, fell by 15.5% from the fourth quarter of fiscal 2008.

Revenue dropped in all three of the company's business segments. Sales in what Johnson Controls calls the Automotive Experience segment (auto interiors) dropped by 14%. Power Solutions (a.k.a. batteries) showed a drop in sales of 14%. And the Building Efficiency unit (air conditioning and build energy management) witnessed a 16% drop in sales.

But units that had been in the red, such as Automotive Experience, returned to the black in the quarter even with the drop in sales thanks to aggressive cost cutting. And units that had been profitable, such as Power Solutions, saw operating margins increase.

The stock dropped on the earnings news, however, because the company issued what Wall Street decided was disappointing guidance for fiscal 2010. Earnings for the upcoming fiscal year will be $1.35 to $1.45 a share, rather than the $1.54 Wall Street had projected. Revenue will be, the company projects, $31 billion. Analysts had been predicting $31.1 billion.

As I write this, the stock is down 5.2% for the day.

I think that's excessive, and I'd use the day's sell off to add to positions. (The drop is especially overdone if the economy has started to grow again. We'll know on Thursday when we get the initial numbers for third-quarter gross domestic product (GDP). See my posts from October 26 and today on why this number has frozen the market.)

The difference between what management projects and what Wall Street expects is nothing more serious than a case of management announcing goals it's sure it can beat. (What? Do you mean companies keep earnings expectations low so they can beat them come reporting time? Shocking, isn't it?)

If you break down the company's guidance segment by segment, the goals are extremely conservative. In Building Efficiency, management is looking for sales growth of just 3% in fiscal 2010. In Automotive Experience, the guidance calls for 1.3% to 1.6% margins (and 13% sales growth.) 

Power Solutions is the only segment where the company's guidance doesn't strike me as extremely conservative. There, management is calling for 17% revenue growth and margins of 10% to 11%.

In many of its businesses -- Automotive Experience, for example -- Johnson Controls seems to be taking market share. Cost-cutting measures will translate into improving margins as sales volume gradually returns.

As of October 27th, I'm raising my target price for Johnson Controls by $1 to $32 a share by July 2010.

At the time of this writing, Jim Jubak owned shares of Johnson Controls in his personal portfolio.


Please help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.
100 character limit
Are you sure you want to delete this comment?


Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.


StockScouter rates stocks from 1 to 10, with 10 being the best, using a system of advanced mathematics to determine a stock's expected risk and return. Ratings are displayed on a bell curve, meaning there will be fewer ratings of 1 and 10 and far more of 4 through 7.

123 rated 1
262 rated 2
480 rated 3
651 rated 4
649 rated 5
629 rated 6
616 rated 7
496 rated 8
346 rated 9
111 rated 10

Top Picks

TAT&T Inc9



Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.

Contributors include professional investors and journalists affiliated with MSN Money.

Follow us on Twitter @topstocksmsn.