Johnson Controls' global balancing act
The company now claims a 45% share of the Chinese auto seating market.
Johnson Controls illustrates to me the importance of looking at where a company’s growth, revenue, and earnings are coming from in terms of geography and industry.
The fiscal first quarter of 2011, the one the company just reported, is typically a seasonally weak quarter -- which is what makes the results so positive. The company reported record net sales for the quarter of $9.5 billion, up 13% from the fiscal first quarter of 2010. Earnings of 55 cents a share beat the Wall Street consensus by a penny.
The stock got dinged because margins fell by 1.7 percentage points from the fourth quarter of fiscal 2010. But a drop in margins in this quarter is normal for the company, and year-to-year margins climbed by 0.1 percentage points.
Six months ago, Johnson Control’s extraordinary performance this quarter in China’s market for auto interiors would have been grounds of cheering. Sales in Asia climbed 49% and in China alone by 37% from the first quarter of fiscal 2010. The company now estimates that it holds a 45% share of the Chinese auto seating market. The company’s battery business in China grew at a double-digit rate, and the company will begin construction on a third Chinese battery plant in February 2011.
Of course, what was good news then generates worry now. China’s cities are slapping limits on new car registrations in an effort to reduce congestion, and if China’s economy slows due to efforts to fight inflation, it’s only logical to expect that Johnson Controls will sell fewer auto interiors in China.
Fortunately, the company has sources of growth that would offset some or all of the China shortfall. Johnson Controls made two European acquisitions in 2010 that the company projects will close in the second and third quarters of fiscal 2011. Revenue from those acquisitions is projected at $700 million in 2011.
Auto sales in the United States and in Europe are forecast to increase in 2011. Johnson Controls raised its forecast for U.S. auto sales in 2011 to 12.5 million units from an earlier forecast of 12.3 million and for European sales to 18.3 million from 17.6 million units. And, finally, the company’s building efficiency business, which has been hurt by a slowdown in U.S. residential and commercial construction, showed real progress in the quarter with sales climbing to $3.4 billion, up 13% from the first quarter of fiscal 2010.
The company raised guidance for fiscal 2011 to earnings of $2.50 to $2.55 a share from the previous $2.30 to $2.45. Guidance for revenue went to $38 billion from a previous $37 billion.
Looking at the potential for a slowdown in China and for a pickup in the United States and Europe (and especially for a pickup in the building efficiency unit), it’s up to investors to judge the credibility of that increase in guidance. To me it seems reasonable.
The stock at the January 21 close of $38.75 trades at just 15.2 to 15.5 times the new guidance for fiscal 2011. Wall Street analysts peg earnings growth at 28% in fiscal 2011 and 19% in fiscal 2012. I think the guidance from the company and the projections from Wall Street are reasonable enough, given the company’s sources of growth in the United States and Europe, to keep me onboard this stock at this multiple even with the possibility of a slowdown in China. And I do like the long-term prospects for growth in China after any economic slowdown.
As of Jan. 25, I’m raising my target price to $51 a share by October 2011 from the prior target of $42 by January 2011.
Johnson Controls isn’t especially unusual in its China exposure for a U.S. or European multinational. One of the trickiest aspects of any emerging-economy slowdown in 2011 is judging how big a deal it would be for one of today’s truly global companies.
At the time of this writing, Jim Jubak didn't own shares of any companies mentioned in this post in personal portfolios. The mutual fund he manages, Jubak Global Equity Fund (JUBAX), may or may not own positions in any stock mentioned. The fund did own shares of Johnson Controls as of the end of December. For a full list of the stocks in the fund as of the end of the most recent quarter, see the fund's portfolio here.
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