Image source: Getty Images.
Summer is in full swing, and things are bound to get even more heated as companies start to report their quarterly earnings. Johnson Controls (JCI +0.73%) is set to release its Q3 2016 earnings on July 21. Let's choose a few points to focus on so we don't get burned by being unprepared.
Stay on target
One surprise from the previous quarter was a deal inked with Target. Over the next three years, Johnson Controls will will replace 3,600 rooftop units with more efficient HVAC equipment at 225 Target stores. This is an unusual deal for Johnson Controls, but it proves that the company is well-positioned to take advantage of what research group Navigant predicts will be a growing market, and it will be interesting to see if the company has been able to sign similar deals.
According to a recent report, Navigant estimated that "the global revenue for energy efficiency commercial building retrofits is expected to grow from $71.4 billion in 2016 to $100.8 billion in 2025." With a commanding global presence -- one that has been enhanced by a joint venture with Hitachi -- Johnson Controls is in an excellent position to provide its Metasys Building Automation System to both old and new customers worldwide.
Powering on
Turning from the building efficiency segment to power solutions, one thing to focus on is the segment margin. During an Analyst Day presentation back in December, management revised its forecast down -- from 17.5% to 17% -- for the fiscal 2016 segment margin based the revision on increased costs associated with construction of a new plant and launch costs in China.
Between 2015 and 2020, Johnson Controls will invest, in total, more than $780 million globally to increase AGM manufacturing capacity. Image Source: Johnson Controls Corporate Website.
One of the priorities is the expansion of the company's absorbent glass mat (AGM) battery production capacity -- an expected major driver of the segment's growth in the years to come.
For the six months ended on March 31, the segment margin totaled 18.2%, so look for the Q3 margin to contract or be level with the 16.6% margin it reported in Q2.
A return to a return
Lastly, one area to look for is whether management decides to resume its share repurchase plan. In its Q2 earnings presentation, the company suggested it would begin to buy back shares to the tune of $500 million by the end of 2016. It had temporarily put its repurchase plan on hold for the first half of 2016 as it navigated the spinoff of Adient -- resulting in separation costs between $400 million and $600 million -- and the merger with Tyco International (TYC +0.00%).
Announcing its plan in 2014, managment stated its intention to repurchase $3.65 billion in stock between 2014 and 2017. Should the company complete the $500 million repurchase, it would need to buy back another $900 million in Q4 and into FY 2017 to make good on its plan.
The takeaway
Johnson Controls is one step closer to achieving its new identity, one that features two operating segments: building efficiency and power solutions. Spinning off its automotive interiors business, Johnson Controls believes the new entity, Adient, will begin operating as an independent company at the end of October.
The company is forecasting diluted EPS to fall between $1.01 and $1.04 for the third quarter -- an 11% to 14% gain over the same period last year. Analysts are also expecting earnings to fall within that range. Of the 16 analysts covering the company, the average EPS estimate is $1.03.
Further demonstrating management's optimistic outlook, it provided an upward revision of its FY 2016 guidance during its Q2 earnings presentation. While it had previously guided for diluted EPS between $3.70 and $3.90, it issued a new and improved forecast of diluted EPS between $3.85 and $4.00 -- an improvement between 13% and 17% over fiscal 2015. It will be interesting to see if the company can follow through on its bullish outlook.
