In this article, let's take a look at one company in the Auto Parts & Equipment sub-industry and try to explain to investors the reasons this is an apparently appealing investment opportunity.
Johnson Controls Inc. (JCI, Financial) supplies building controls and energy management systems, automotive seating, and batteries. It operates in three primary businesses: Building Efficiency, Automotive Experience and Power Solutions. The Building Efficiency segment provides facility systems, services and workplace solutions including comfort, energy and security management for the residential and non-residential buildings markets. The Automotive Experience segment designs and manufactures interior systems and products for passenger cars and light trucks, including vans, pick-up trucks and sport/crossover utility vehicles. The Power Solutions segment designs and manufactures automotive batteries for the replacement and original equipment markets.
Joint Venture
Johnson Controls signed a deal with Tokyo-based Hitachi Ltd. to buy 60 percent of Hitachi Appliances’ global air conditioning business. The scope of the deal includes the marketing and sales of products such as variable refrigerant flow and inverter technologies in the commercial and residential markets. This partnership will help Johnson Controls become the world's largest commercial air conditioning provider. The joint venture is expected to start in 2014, pending necessary approvals.
Academic Partnership
The company announced another academic partnership to advance development of battery and energy storage technology, this time with a Michigan university. The Glendale-based company and Lawrence Technological University in Southfield, Mich., will sum forces to identify and validate new energy storage technologies for vehicles. The new technology will enhance fuel efficiency and provide better emissions standards.
Key Drivers
The company engages in acquisitions and divestitures as it seeks to strengthen and optimize its operating and financial performance. Johnson Controls expects earnings per share between $3.15 and $3.30 for FY14. Revenues are likely to improve in all the business segments and will benefit from higher automotive production. It is also looking for growth in emerging markets.
Analyst Recommendation
The firm is currently Zacks Rank # 3–Hold, and it also has a longer-term recommendation of “Neutral”. A Hold rating indicates that the stock, over the next 1 to 3 months, will perform at an annualized rate of 10.56%, very similar to the S&P 500. For investors looking for a Zacks Rank # 1–Strong Buy, Commercial Vehicle Group Inc. (CVGI, Financial), Gentherm Incorporated (THRM, Financial), Modine Manufacturing Company (MOD, Financial) and Superior Industries International, Inc. (SUP, Financial) could be the options.
Relative Valuation, Earnings and ROE
In terms of valuation, the stock sells at a trailing P/E of 24.7x, trading at a premium compared to the industry mean. During the past fiscal year, it reported lower earnings of $1.71versus $1.79 in the prior year, but earnings per share (EPS) have increased by 32.7%in the most recent quarter compared to the same quarter a year ago. This year, Wall Street expects an improvement in earnings ($3.25 versus $1.71).
In the next graph we include the stock price because EPS often lead the stock price movement. As we can appreciate in the chart, the price performance showed an interesting upward trend in the last five years.
Finally, I always like to see one of the most important financial ratios applying to stockholders, the best measure of performance for a firm's management: the return on equity. The ratio has increased from the same quarter one year prior. This is a clear sign of strength within the company.
Let´s compare the current ratio with the peer group in the next table:
| Ticker | Company Name | ROE (%) |
| JCI | Johnson Controls | 9.57 |
| CVGI | Commercial Vehicle Group Inc. | -20.77 |
| THRM | Gentherm Incorporated | 14.57 |
| MOD | Modine Manufacturing Company | -9.11 |
| SUP | Superior Industries International | 4.72 |
| MGA | Magna International Inc | 15.2 |
| WBC | Wabco Holdings Inc | 56.66 |
| ACW | AccurideCorp | -61.91 |
Johnson has a current ratio of 9.57% which is higher than the ones registered by Commercial Vehicle Group Inc., Modine Manufacturing Company, Superior Industries International and Accuride Corp (ACW, Financial). For investors looking for a higher ratio, Gentherm Incorporated, Magna International Inc (MGA, Financial) and Wabco Holdings Inc (WBC, Financial) has a tremendous ratio.
Final Comment
As outlined in this article, deals, partnerships, acquisitions and growth drivers for the company look very attractive and make me feel bullish on Johnson Controls.
I would recommend investors to consider adding the stock for their long-term portfolios. Hedge fund gurus have also been active in the company in the fourth quarter of 2013. Gurus like Jeremy Grantham (Trades, Portfolio), Steven Cohen (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio) and Joel Greenblatt (Trades, Portfolio) have taken long positions on it.
Disclosure: Victor Selva holds no position in any stocks mentioned.
