Going Green—with Profits, Too

08/24/2010 10:14 am EST


Joseph Hargett

Financial Analyst, Schaeffer's Investment Research, Inc.

Joseph Hargett of Schaeffer’s Investment Research says a former auto parts company has branched out to green business, but its stock is at a crossroads now.

According to [a recent] Barron's cover story (“Totally in Control,” August 16th), Johnson Controls (NYSE: JCI) is not only "greening the Empire State Building," but also investors' wallets.

Focusing heavily on the company's fundamentals, author [Michael Santoli] relates how the company's growth in the building-efficiency sector is helping offset sluggishness in its automotive business. "Despite the growth of the building-efficiency business, Wall Street continues to view Johnson Controls primarily as an auto-parts maker," [he writes].  

But the article claims that "the company is afforded too little credit for its competitive advantages in the auto market." For instance, Barron's states that "Wall Street's skepticism was evident when the company reported fiscal third-quarter earnings July 23rd. Per-share profit of 54 cents was a penny shy of the collective forecast, prompting a 5% sell off that day in the stock."

The problem, [writes Santoli], is that a handful of items actually overshadowed what was, essentially, a better-than-expected quarter.

In addition to JCI's improving long-term fundamental outlook, the company has several short-term drivers, including its contract to lead the retrofitting of the Empire State Building and its meeting on dividend policy in November. “With its well-designed growth strategy and apparent desire to share more cash with investors, it is living up to [its] admirable reputation," the article concludes.

While the company's outlook may be improving, JCI has topped Wall Street's expectations in only two of the prior four reporting periods. Furthermore, the stock's price action has also been lackluster, up only about 4% [so far this year]. During the past three months, the stock has been range-bound between support near $27 per share and resistance at $30 per share. (It closed below $28 Monday—Editor.)

Surprisingly, the company's mediocre fundamental and technical performances have been greeted with a wash of bullish sentiment. On Wall Street, JCI has attracted 12 Buys, seven Holds, and no Sell ratings, according to Zacks Investment Research. What's more, Thomson Reuters places the stock's consensus 12-month price target at $36.88 per share—a premium of 30% to the equity's current [price].

Elsewhere, the stock's Schaeffer's put/call open interest ratio (SOIR) of 0.53 indicates that calls nearly double puts among options with less than three months until expiration. This ratio also ranks below 92% of all those taken in the past year, meaning that options traders have rarely been more optimistically aligned. And, while it can't be said that short sellers are bullish on JCI, the stock's current short-to-float ratio of 0.84 reveals that they most certainly are not betting against the equity.

From a contrarian perspective, this bullish Barron's piece could be viewed as one more strike against a company that is struggling both fundamentally and technically. If global economic concerns continue to mount, or if JCI fails to live up to elevated expectations, the stock could find itself pressed sharply lower as investors abandon their bullish bets.

Subscribe to the Option Advisor here…

  By clicking submit, you agree to our privacy policy & terms of service.

Related Articles on STOCKS