When China Becomes an Albatross

07/23/2010 1:47 pm EST


Jim Jubak

Founder and Editor, JubakPicks.com

Forget about the penny miss in quarterly earnings. Put a failure to increase guidance for the full year on the back burner.

Wall Street seems to be nervous about the long-term direction of Johnson Controls (NYSE: JCI). At a time when exposure to China is a worry rather than a growth opportunity, Johnson Controls is committed to growing its business there. Today’s miss and lukewarm guidance are really just an excuse for short-term thinkers to jump ship. And jump they have today: The stock traded above $29, down less than 5%, as of 1:00 pm ET.

Before the New York markets opened on July 23, Johnson Controls reported earnings of 54 cents a share for the third quarter of its September 2010 fiscal year. That was a penny worse than Wall Street had expected, but still represents earnings growth of 116% from the third quarter of fiscal 2009. Revenue climbed by 22% over that same period, edging just above consensus.

The company’s guidance for the fiscal year came in a little short of Wall Street projections, too. The company said it expects full-year earnings of $1.95 per share. That’s up slightly from earlier guidance of $1.90 to $1.95 a share, but it is a bit below Wall Street estimates of $1.98. In the full 2009 fiscal year, Johnson Controls lost 31 cents a share, so even the horribly disappointing $1.95 a share represents quite a turnaround.

So, why the big selloff?

Two reasons.

First, in the run-up to the earnings report, analysts had started to downgrade the stock on valuation. It was simply too expensive at or near $30, especially to investors who figured that the stock would hit resistance at its April 19 high of $34.50. So, the earnings report on July 23 was a reason to sell.

And, of course, Wall Street being Wall Street, analysts were out the day of the selling to say that Johnson Controls, down 7% then, was now a buy on valuation.

Second, Johnson Controls has big exposure to China’s auto industry—and the company seems committed to growing that presence. Evidence?  On May 21, Johnson Controls made an offer to buy the auto interiors and electronics business of Visteon (OTC: VSTNQ).

Visteon, the former parts division of Ford (NYSE: F), filed for Chapter 11 bankruptcy reorganization in May 2009. It rejected the deal, but the damage had been done.

Everybody is nervous that China’s growth is going to slow—maybe even plunge on the bursting of the country’s real estate bubble. And Johnson Controls wants to do more business in the country? Let me out of here! (For more on a possible bursting of the Chinese real estate bubble, see this new edition of Jubak’s Journal.)

Of course, the China story that drives short-term investors and traders nuts about Johnson Controls is one of the reasons that long-term investors want to own this stock.

As of July 23, I’m leaving my target price for Johnson Controls at $39 a share but stretching out the timetable to January 2011 from July 2010.

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See the complete Jubak Picks Portfolio here

Full disclosure: I own shares of Johnson Controls in my personal portfolio.

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