Johnson Controls' global balancing act

The company now claims a 45% share of the Chinese auto seating market.

By Kim Peterson Jan 25, 2011 5:37PM
Jim JubakLet me use Johnson Controls (JCI), which reported quarterly earnings Jan. 20, as another concrete example of how to think your way through what to do about individual stocks when the U.S. market seems to be looking for a 5% pullback and overseas markets have the potential for a 20% correction.

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.

More from MoneyShow.com:


0Comments

DATA PROVIDERS

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.

STOCK SCOUTER

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.

108
108 rated 1
257
257 rated 2
439
439 rated 3
626
626 rated 4
499
499 rated 5
530
530 rated 6
713
713 rated 7
522
522 rated 8
339
339 rated 9
136
136 rated 10
12345678910

Top Picks

SYMBOLNAMERATING
UPLULTRA PETROLEUM Corp10
EOGEOG RESOURCES Inc10
SWNSOUTHWESTERN ENERGY COMPANY10
TAT&T Inc9
COPCONOCOPHILLIPS9
More

VIDEO ON MSN MONEY

ABOUT

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.