In my previous post, 3 months ago, I stated that JCI was overvalued compared to a peer group, made of Valeo SA, Faurecia SA, Continental AG, GKN PLC, Schneider SA and SAFT SA.
Guess what, JCI is languishing in the bottom of the pack. Same chart in a US$ would wipe another 2% to JCI relative performance.
It's interesting to note that the potential break-up of the JV lead to a plunge of SAFT's share price, yet JCI has not done better. It tells me that JCI'S investors have tainted glasses by massively overvaluing the automotive division in a sum-of-part approach, or if you prefer, apply racing multiples (battery, building) to a low-margin, low RoCE division. (For an appetiser, compare Continental or Valeo's RoCE with that of JCI's automobile division).
I'm not expecting for any constructive views or replies here.
(continued from above)
2. WHEN DIVERSIFYING ADDS VALUE. Another reason JCI maybe gets a higher P/E is a greater ability to resist "cycles" and thus have more even, steady growth instead of a mix of ultra-hot boom years and wallet-killing bust years.
JCI did this by diversifying sector-wise. When one growth segment is down (say, automotive batteries), another growth segment can be up (say, heating and cooling controls), so the result is fairly even and consistent growth, then the company avoids P/E-killing cycles.
3. VALUING PARTS VS. WHOLE. How does that affect valuation? As long as the parts work this way, countering each other's downturns, that means "sum-of-the-parts" UNDER-estimates the value of the whole. In an undiversified company, purely auto batteries, or purely heating-and-cooling, any downcycle goes deeper, so lots of investors bail out, dump theri stock, reducing its price. A properly diversified company uses its more even growth to avoid those dumping reactions.
Ford has reduced its cycling too, but has a better angle:
(a) Ford matches production to demand (no excess capacity, not excess discounting), which JCI probably does as well. BUT, in addition,
(b) Ford changed and is still changing its manufacturing processes to be more efficient (replacing more and more "local platforms" with "global platforms"). That innovation lets different car models have share certain fixed costs, so the fixed cost PER CAR becomes less. That means Ford can break-even on each car model with fewer vehicles being produced than before. If demand starts goes down in a recession, Ford will no longer be immediately killed by fixed costs eating up too much of the revenue, but will have time to react.
(c) Another thing Ford did was to sell/eliminate divisions that either were not making money for the company (Jaguar, Land Rover) or that violated the global platform principle (Aston Martin) or served an aging and hence shrinking demographic (Mercury). Ford had OVER-diversified, took on divisions that were too small to justify the special attention an added division required. So, Ford de-diversified, switched from "growth by acquistion" to "growth by innovation". The start-and-stop technology appears to be a great innovation that will benefit both Ford and JCI.
4. MAYBE A PROBLEM--JCI's LOWER EARNINGS/REVENUE. Those things raised Ford's earnings/revenue well above GM's (using pre-tax operating profit as earnings, eliminating one-time expenses or sales). It's correct that JCI is lagging here.
Maybe that will change when the stop-and-start innovation comes online?? Maybe JCI needs to ask what is weak versus what is strong within its diversification-acquisition scheme??
Source: http://finance.yahoo.com/q/ks?s=JCI+Key+Statistics JCI's P/E (trailing) is 17ish, with quarterly growth of 20%ish YOY, but its operating margin is just 5%ish, so improvement to all by improving THAT might happen.
DISCLOSURE: Have Ford shares, warrants and bonds, but am diversified and keep cash. Though I think it is a good company, have no JCI currently, as that would be too much in the auto sector.
JB, Shaggy's mom
An advantage of JCI over F that you fail to factor into your analysis is that JCI will profit from growth in automotive sector REGARDLESS of individual automaker performances. If F fails to grow even though automotive as a sector does, then JCI will profit and F will not. This applies to auto parts makers in general.
alpha/alphahunter. Thanks for the chart link. The things charted are converging right now?
Maybe JCI's expensive, but maybe it has good growth prospects due to some innovations coming to market?? These may involve Ford, beginning 2012. Your comparison group has the same innovations? If not, JCI maybe deserves a higher P/E than the rest of them.
1. SPECIAL AUTO BATTERY TECHNOLOGY-- HI MPG.
The newish hybrid technology in cars, out for a few years, tends to be expensive, at least for now. The market for SPECIAL batteries for hybrids thus is limited, for now, for JCI.
BUT, there is something new coming, less expensive, that falls IN-BETWEEN hybrids and regular auto technology that will add 4% to 10% to the miles per gallon. Called "Start-and-Stop", isshould be a much larger biz. MUCH. This tech has its own special battery, with JCI involved, and Ford Motor. Some posts on it were here:
To find the battery type, search for glass mat. Here's a piece on Ford Motor's role (ticker=F):
I'm not in JCI right now, but assumed it was doing so well, getting ready to move past price resistance, due to the new Start-and-Stop biz. It will be coming in 2012.
More points, some favoring JCI, some not, next post.
JB, Shaggy's mom