On May 26, we maintained our Neutral recommendation on Johnson Controls Inc. (JCI) based on its leading position in the automotive interiors market together with better opportunities from restructuring initiatives and improvements in European and South American Automotive Experience businesses. However, we are concerned about the decline in earnings and revenues in the second quarter of fiscal 2013.
On Apr 23, Johnson Controls posted a 23.6% decline in adjusted earnings to 42 cents per share in the second quarter of fiscal 2013 from 55 cents in the same quarter of prior year. However, earnings were in line with the Zacks Consensus Estimate.
Revenues in the quarter slipped 1.3% to $10.43 billion, but marginally exceeded the Zacks Consensus Estimate of $10.39 billion. The decline was attributable to lower revenues in the company’s Automotive Experience and Building Efficiency segments.
Following the release of the first quarter results, the Zacks Consensus Estimate for 2013 remained constant at $2.60 per share. Meanwhile, the Zacks Consensus Estimate for 2014 increased 1.3% to $3.14 per share. Currently, Johnson Controls maintains a Zacks Rank #3 (Hold).
Johnson Controls’s battery business will benefit from rising demand for new hybrid batteries. It is the leading supplier of Start-Stop batteries in Europe banking on its VARTA brand. Johnson Controls expects the Start-Stop batteries market to improve to 35 million units by 2015.
Johnson Controls expects to benefit from restructuring initiatives, higher profitability from its Building Efficiency segment and improvements in European and South American Automotive Experience businesses in the second half of 2013. Higher profitability in Power Solutions business in the second half of fiscal 2013 is also expected to have favorable impact on the company.
However, Johnson Controls faces pricing pressure from OEMs due to their high inventory levels. In addition, volatility in commodity cost and strong competition from major domestic, international manufacturers and distributors of lead-acid batteries could mar the profitability of Johnson Controls.
Other Stocks to Look For
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