On Mar 22, we maintained our Neutral recommendation on Johnson Controls Inc. (JCI) based on its leading position in automotive interiors, batteries and other control equipments market. However, we are concerned about the pricing pressure from OEMs and strong competition together with weak end markets and adverse effects of foreign currency.
On Jan 18, Johnson Controls posted a 16.1% fall in earnings in the fiscal 2013-first quarter to 52 cents per share from 62 cents in the same quarter last year as global demand for its products weakened. However, earnings surpassed the Zacks Consensus Estimate by a penny.
Revenues in the quarter were flat at $10.4 billion, but exceeded the Zacks Consensus Estimate of $10.2 billion. Revenues remain unchanged as the benefit from strong business backlog was offset by weak demand across the globe, especially in Europe.
Following the release of the first quarter results, the Zacks Consensus Estimate for 2013 went down 1.5% to $2.60 per share. Meanwhile, the Zacks Consensus Estimate for 2014 declined 3.4% to $3.10 per share. Currently, Johnson Controls maintains a Zacks Rank #3 (Hold).
Johnson Control’s battery business will benefit from rising demand for new hybrid batteries. It is the leading supplier of Start-Stop batteries in Europe with its VARTA brand and Johnson Controls expects that market for Start-Stop batteries to improve to 35 million units by 2015.
Johnson Control will benefit from its focus on China. The company operates 26 manufacturing plants catering to the automotive business and commands 50% market share in seating business in China. Johnson Control is also investing in the automotive battery plants in Shanghai, which is expected to produce 30 million batteries by 2015.
However, Johnson Controls faces pricing pressures from OEMs due to their high inventory levels. In addition, volatility in commodity cost and strong competition from major domestic and international manufacturers and distributors of lead-acid batteries could mar the profitability of Johnson Controls.
Other Stocks to Look For
Few stocks that are performing well in the industry where Johnson Controls operates include Gentherm Inc (THRM), STRATTEC Security Corp (STRT) and Denso Corp (DNZOY). All these companies carry a Zacks Rank #1 (Strong Buy).
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