Johnson Has It Under Control

04/26/2011 5:16 pm EST


Jim Jubak

Founder and Editor,

Johnson Controls (JCI) fell 2.8% yesterday, April 25, because I don’t think investors immediately understood the company’s results.

And the shares are back up 2.7% today, because I think they get it now.

Fiscal second-quarter earnings, Johnson Controls announced, were 56 cents a share—a penny better than Wall Street had expected—on revenue of $10.14 billion. That was a 22% increase in revenue from the second quarter of 2010, and well above the $9.37 billion analysts had projected. (Johnson Controls’ second quarter ends in March.)

No problems there.

But for the next quarter, the company expects earnings of only 51 to 53 cents, instead of the 67 cents that Wall Street was projecting.

The problem, of course, is disruptions to production at Japanese auto companies (in Japan and overseas) as a result of the Japanese earthquake and tsunami.

In its conference call, the company laid out the consequences of that disaster to its business in very specific detail. Based on the latest forecasts from customers, the company calculates that, in its fiscal third quarter, it will lose about $500 million in revenue in its auto business. That will reduce earnings by 16 to 18 cents a share.

The company doesn’t anticipate any significant impact on revenue in the fourth quarter, and said it will recover lost revenue and earnings from the third quarter in the first half of fiscal 2012. (Which, on the company’s calendar, begins October 2011.)

Do some simple math and two things should pop out at you.

First, investors wiped $786 million off Johnson Controls’ market capitalization on April 25, on what amounts to a timing issue. The company will get all the revenue and earnings anticipated in its stock price before this news, but a couple of quarters later.

Second, if you subtract the 16 to 18 cents that Johnson Controls calculates it will get docked from earnings from the 67 cents Wall Street was expecting for the third quarter, you get less than the 51 to 53 cents that Johnson Controls told Wall Street to expect.

In other words: In the midst of all this turmoil from the disaster in Japan, something is going right with Johnson Controls’ business.

That something is the long awaited recovery in the company’s Building Efficiency unit, the business at the company that produces equipment, controls, and management services for heating, ventilating, air-conditioning, refrigeration, and security systems.

Sales for that unit, which have been depressed by the downturn in residential and commercial construction in the aftermath of the global financial crisis, climbed 18% in the second quarter.

The biggest increase came in Asia, where sales jumped 31%, and in global workplace solutions, a 27% increase. (The global workplace solutions business offers the company’s integrated solutions to managing everything from energy use to security for a customer's buildings.)

Income for the Building Efficiency unit was up 27% for the quarter from the fiscal second quarter of 2010.

And, Johnson Controls said in its conference call, the improvement in that unit isn’t going to end right away. The company increased its guidance for 2011 revenue to $39.5 billion (a 15% increase from revenue in 2010) from earlier guidance of $38.5 billion.

The increase comes from higher projections for the Building Efficiency unit, which the company projects will grow revenue by 15% in 2011. That’s much better than the earlier guidance of 8% to 10% growth.

Some of that improvement will be cancelled out in the next quarter by the production disruptions in the company’s automotive business after the disaster in Japan. But the improvement in Building Efficiency will still be there when the disruptions are history.

I think a reasonable target price given the company’s increased guidance is $54 a share by December 2011. That’s up from my prior guidance of $51 by October 2011.

Full disclosure: I don’t own shares of any of the companies mentioned in this column in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund (JUBAX), may or may not now own positions in any stock mentioned in this column. 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 here.

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