Hold stock pick Johnson Controls for delivery on second-half promises

05/22/2013 4:07 pm EST


Jim Jubak

Founder and Editor, JubakPicks.com

Shares of Johnson Controls (JCI) hit a new 52-week high yesterday on anticipation of a better than expected second half for calendar 2013. They also hit my $37 target price in my Jubak’s Picks portfolio http://jubakpicks.com/

What to do? Hold on for the anticipated improvement in earnings in the June and September quarters and into the 2014 fiscal year that begins with the December quarter.

You can see the anticipated improvement earnings if you look at the quarterly breakdown in analyst projections. For the June 2013 quarter, Wall Street is expecting earnings growth of 17% and for the September quarter earnings growth of 18%. Despite that surge in the last two quarters of company’s 2013 fiscal year, growth for fiscal 2013 will be an anemic 0.4%.

The shares aren’t terribly expensive even after climbing 26.4% in 2013 as of May 21. At today’s $37.42, they trade at just 14 times projected earnings per share for the fiscal year that ends in September 2013. That’s near the lower end of the historical price-to-earnings ratio on the shares, according to Standard & Poor’s.

But to move up from here the company will need to deliver on Wall Street’s hopes for the second half of fiscal 2013 and for fiscal 2014, which begins with the December 2013 quarter. Wall Street right now is expecting 21% growth for fiscal 2014.

I think the odds are in favor of the second-half promise coming true. The company’s building efficiency (temperature and energy management for non-residential buildings) and its battery units show strong seasonality with revenue and margins both picking up in the warmer months. I’d add in price increases in the company’s aftermarket battery segment of 3% to 4% that will kick in beginning n July. (Price increases for the building efficiency business that went into effect at the end of 2012 will show up in the second half of 2013.) And finally, $375 million or so in restructuring charges that the company took in the third and fourth quarters of fiscal 2012 and in the first quarter of fiscal 2013 should help margins in the second half of fiscal 2013.

A weak European economy could be a problem if it leads to as steeper than now expected drop in auto sales in that market. Right now the North American market looks likely to continue its recovery with light vehicle sales on a path to 15.4 million units in 2013 from 14.4 million in 2012. April figures on new car registrations in Europe weren’t as positive as they first seemed. Registrations did climb in April 2013 by 1.7% from April 2012, the first year over year increase since September 2011, but the gain was almost entirely due to the way that Easter fell in 2013 versus 2012. The calendar change added two selling days to April 2013. The best that can be said about the April numbers, finally, is that they don’t show demand driving over a cliff. Everybody expects European auto sales to be down; as long as they’re not down way more than expected, bad news counts as good news.

As of May 22 I’m raising my target price for these shares to $42.40 by December 2013. The shares carry a 2.1% dividend yield. The next quarterly dividend of 19 cents a share will be paid to shareholders of record as of June 7.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , I liquidated all my individual stock holdings and put the money into the fund. The fund did own shares of Johnson Controls as of the end of March. For a full list of the stocks in the fund as of the end of March see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/
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