Why Would Johnson Controls' Share Price Drop After a Surge in Earnings?

What: Shares of Johnson Controls (NYSE: JCI  ) are trading around 4% lower Thursday despite a surge in its quarterly earnings. In Johnson Controls' first fiscal quarter of 2014 it posted a 5% increase in sales to $10.9 billion. The company's segment and net income improved 25% and 31% to $686 million and $469 million, respectively. Johnson Controls' earnings per share rose 33% to $0.69. Let's break it down into its three business segments and better understand where growth will be coming from in 2014 and why investors are selling today. 

Power solutions: Johnson Controls' power-solutions business segment benefited from higher volume, improved pricing and mix, as well as its increased vertical integration. That contributed to a 6% increase in net sales to $1.8 billion. The improved pricing and product mix enabled the segment to improve its margins by 90 basis points, which improved segment income by 12% to $308 million. The segment's sales were boosted by a strong performance in Asia where sales were up 22%.

Building efficiency: This segment represented the biggest hurdle during Johnson Controls' first fiscal quarter with net sales declining 4% to $3.4 billion and segment income down 15% to $146 million. Net sales were dragged down by soft demand; the Middle East and Europe were down 31% and 17%, respectively. While a 15% decline in segment income is rough no matter how you slice it, there are two things to consider.

In this quarterly report is a nonrecurring contract-related charge of roughly $20 million. Also, the quarterly comparison was more difficult because the first fiscal quarter of 2013 benefited from a $22 million contract settlement. When you take those two factors out of the equation, the building efficiency's segment income actually improved 6% despite the 4% decline in net sales -- proof that the company's focus on operating efficiency and cost control is paying dividends.

Automotive experience sales are surging. Source: Johnson Controls

Automotive experience: As you would expect with the automotive industry rebounding nicely over the last couple of years, Johnson Controls' automotive experience segment has surged. The segment's net sales and income were up 10% and 130% to $5.8 billion and $232 million, respectively, for the quarter. Seating, interiors, and electronics, posted sales increases of 10%, 13%, and 7%, sequentially. It should be noted that Johnson Controls is exiting its electronics business to lower its investments in new technology and automotive connectivity trends.

The significant improvement in profitability is due to higher volumes and benefits of cost-reduction strategies. Johnson Controls is gaining its own market share in its automotive experience business segment, and that's compounded as its automotive partners are gaining share in the overall automotive industry.

Looking ahead
In addition to its improving business, Johnson Controls increased its quarterly dividend by 16% and repurchased $1.2 billion shares. The company is trading lower today as analysts expected a better forecast for the second quarter. I think the sell-off is unwarranted and investors should keep in mind that Johnson Controls is expecting its second fiscal quarter of 2014 to post earnings per share between $0.64 and $0.66 -- a 45% improvement from last year's comparable quarter. For 2014, the company expects sales to improve and segment income to rise 15%.

"We remain focused on operational improvements to drive continued increases in profitability and shareholder value and expect 2014 to be a year of record sales and earnings for Johnson Controls." said Alex Molinaroli, Johnson Controls' chairman and chief executive officer.

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