In this article, let's take a look at Johnson Controls Inc. (JCI, Financial), a leading manufacturer of automotive interior systems, automotive batteries and automated building control systems.
Three in One
The company diversifies its business and actually is three companies in one. The automotive segment contributed more than half of fiscal 2013 sales, decreasing for previous levels, so this shows the company's diversification. We believe this trend will continue, with diversification in geography, products and customers.
The building efficiency is crucial and its growth could offset the downturns in the automotive segment. In fiscal 2013, building efficiency contributed to 34% of sales compared with 21% in fiscal 2005.
The company's depth in HVAC equipment and service allow it to differentiate itself from competitors. With more than 15,000 HVAC service providers, it tripled the size of the second-largest player. Additionally, it plans to focus more on profitable HVAC product sales for a 50-50 product and service segment mix.
Growth Drivers
If we expect an increase in the units in U.S. light vehicle sales for 2014, as well as gains in emerging markets (China is a fundamental market), should drive global demand growth and this will clearly benefit revenues, profits and cash flows. For example, revenues will benefit from higher automotive production in all its locations compared to the 2013 level, with 11% improvement in China, 6% in North America and 2% in Europe.
Dividends
Dividends and share buybacks are the primary sources of returning cash to shareholders. Months ago, the board of directors authorized a regular quarterly cash dividend of $0.22 per common share (a 16% increase). The dividend yield is 2.15% which is considered quite good to protect consumer´s purchasing power. Dividends have been paid since 1887.
Revenues, Margins and Profitability
Looking at profitability, revenues grew by 2.98%, but earnings per share decreased in the most recent quarter compared to the same quarter a year ago ($0.35 vs $077). During the past fiscal year, the company reported lower earnings of $1.64 versus $1.79 in the previous year. This year, Wall Street expects an improvement in earnings ($3.16 versus $1.64).
The gross profit margin is rather low at 17.60%, and the net profit margin of 1.62% is similar to the industry average.
Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.
| Ticker | Company Name | ROE (%) |
| JCI | Jonhson Controls Inc | 8.49 |
| LEA | Lear Corp. | 15.39 |
| MGA | Magna International Inc. | 17.72 |
| RTN | Raytheon Co. | 21.00 |
| Ă‚ | Industry Median | 10.14 |
The company has a current ROE of 8.49% which is lower than the industry median and the ones exhibit by Lear Corp. (LEA, Financial) and Magna International (MGA, Financial). In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So for investors looking those levels or more, Raytheon (RTN, Financial) could be the option. It is very important to understand this metric before investing and it is important to look at the trend in ROE over time.
Relative Valuation and Price Performance
In terms of valuation, the stock sells at a trailing P/E of 27.2x, trading at a premium compared to an average of 15.2x for the industry. To use another metric, its price-to-book ratio of 2.3x indicates a premium versus the industry average of 1.43x while the price-to-sales ratio of 0.6x is above the industry average of 0.62x.
As we can see in the next chart, the stock price has an upward trend in the five-year period. If you had invested $10.000 five years ago, today you could have $16.975, which represents a 11.1% compound annual growth rate (CAGR).
Final Comment
Johnson Controls operates three businesses: the building efficiency segment ($14.6 billion), the automotive experience segment ($21.8 billion) and the power solutions unit ($6.4 billion). Although it gets more than half of its sales from the auto industry, which is very cyclical, it has started a diversification process, which we think is good for the future. Moreover, its stock buyback program is a good signal while it wins back investors’ confidence in the stock.
So in this opportunity, 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 second quarter of 2014. James Barrow (Trades, Portfolio) and John Keeley (Trades, Portfolio) have bought the stock, while Richard Snow (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio) and Mario Gabelli (Trades, Portfolio); and the investment manager HOTCHKIS & WILEY and Pioneer Investments (Trades, Portfolio) have taken long positions on it.
Disclosure: Omar Venerio holds no position in any stocks mentioned.
