Update Johnson Controls (JCI)

06/28/2011 12:59 pm EST


Jim Jubak

Founder and Editor, JubakPicks.com

On paper Johnson Controls (JCI) looks like a cheap growth stock. Wall Street projects earnings growth of 24% in fiscal 2011 and 35% in fiscal 2012. Trading at just 17.7 times trailing 12-month earnings per share and at 16 times projected earnings per share, Johnson Controls sure looks reasonably priced.

But growth stocks are only cheap if projected growth is actually going to turn into real growth. And frankly on this front, the company’s decision, announced on May 18, to end its lithium-ion battery joint venture with Saft made me raise an eyebrow. Sure, Johnson Controls is the largest maker of batteries in North America and the company dominates the lead-acid battery market with a 36%, but that’s an old, established technology. What about the future? Show me the growth.

A month later, I’ve got a much better idea on why the company filed to terminate that joint venture and where it sees growth opportunities. (Johnson Controls has been a member of my Jubak’s Picks portfolio http://jubakpicks.com/ since September 2009.)

Johnson Controls ended its deal with Saft because the terms of the joint venture limited the company to the automotive lithium-battery market and locked it out of the market for batteries in the energy grid. (And Saft’s cylindrical-cell battery technology wasn’t as good a fit with the grid market as prismatic or flat-plate technologies, in Johnson Controls’ opinion.) Moving into the grid market is, Johnson Controls believes, essential to building scale for lithium-ion batteries given the slow ramp of electric car sales.

Go to the Johnson Controls website today and you’ll find a strong pitch for batteries to back up solar installations http://www.johnsoncontrols.com/publish/us/en/products/power_solutions/Applications/Solar.html , for example. This isn’t just a U.S. market either. Pramoda Karkal, managing director of the company’s India unit, told Bloomberg that he sees India’s burgeoning solar market as a big opportunity for Johnson Controls. India has awarded licenses to build 1,100 megawatts of solar capacity by next January. That’s roughly 30 times today’s capacity.

What about new technologies for the car battery market? Johnson Controls is sinking its money--$420 million in R&D between now and 2015—into what’s called start/stop battery technology. A start/stop system automatically turns off the engine of a gas-powered car while it’s idling and then the start/stop battery starts it up again when the driver steps on the gas. It’s not a simple technology to get right—the battery can’t degrade too quickly with all those starts and stops. And it has to provide immediate response when the driver wants to get back into motion.

But it can be an incredibly lucrative market. A start/stop system can yield a 5% to 12% improvement in fuel efficiency for as low a cost as $300 to the carmaker. With Europe phasing in mandated improvements in fuel efficiency as part of its plans to lower carbon emissions, the start/stop market is projected to reach 35 million units in annual sales. Johnson Controls is the early market leader and plans to sell 20 million units annually within the next four to five years.

Building efficiency, now 37% of sales, continues to be another major source of growth. (Building efficiency was just 21% of sales five years ago.) And here the most interesting story is the growth of the building efficiency market in emerging economies. Countries such as China and India have just begun to tackle the relative energy inefficiencies of their economy versus the economies of the developed world. For example, China’s current five-year plan sets a target of reducing energy use per unit of GDP by 16%. India is considering legislation that would restrict the energy consumed by commercial buildings. That could create, Johnson Control’s estimates, a $500 million market for building efficiency services in India within five years.

Shares of Johnson Controls have dropped as the effects of the Japanese earthquake and tsunami have rippled out through the global auto industry. (In April the company estimated that fiscal third quarter revenue (for the quarter that ends on June 30 2011) would be about $500 million lower because of disruptions caused by the Japanese disaster.)

Today’s price just above $40 a share is a good entry point. I’ve got a target price of $54 a share on this stock in Jubak’s Picks for December and I’m leaving that target there.

Full disclosure: I do not own shares of any stock mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , may or may not now own positions in any stock mentioned in this post. 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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