As January and the new year settle in, many of us are wondering what 2017 will have in store. Even more interested are investors in Johnson Controls (JCI +0.44%), who are eager to see how the company performs after having completed its separation from Adient and merger with Tyco. Fortunately, investors have the opportunity to gain some insight, as the company recently held its annual Analyst Day. Let's take a look to see what it anticipates in 2017.
Image source: Getty Images.
Flowing in the right direction
Having completed its merger with Tyco last September, Johnson Controls reported pro forma adjusted free cash flow of $1.9 billion in fiscal 2016. Management forecasts the company will generate about $2.1 billion in adjusted free cash flow during fiscal 2017 -- growth of about 11%. Providing a longer outlook, management has identified a free cash flow target of $3.4 billion in fiscal 2020.
Attempting to dispel any speculation that its estimate implies an inability to healthily grow its cash position, management recognizes several significant factors affecting the company's cash flow. For one, the company will be reporting restructuring costs associated with both its separation from Adient and integration with Tyco throughout fiscal 2017. Capital expenditures will be another factor as the company continues to work toward expanding its start-stop battery manufacturing capacity in North America -- an investment of approximately $245 million from 2016 through 2020.
Rewarding shareholders
During its presentation, management reported that the board has approved a quarterly cash dividend of $0.25 per share throughout fiscal 2017 for an annualized dividend of $1 per share. This may come as a disappointment to investors who owned shares of Johnson Controls prior to its merger. For the last four years, the company's dividend had grown at a compound annual growth rate (CAGR) of 11.15%, ending in an annualized dividend of $1.16 in fiscal 2016. Owners of Tyco's stock prior to the merger, on the other hand, are likely to be pleased with the board's decision.
Recent dividend history of Johnson Controls and Tyco. Image source: Johnson Controls corporate presentation.
From fiscal 2013 through fiscal 2016, Tyco's dividend had only grown at a CAGR of 7.24%. With the annualized dividend of $1 per share in fiscal 2017, though, original investors of Johnson Controls will be looking at a CAGR of 5.64%, while Tyco investors will see a CAGR of 10.03%.
In terms of share repurchases, Johnson Controls doesn't have any clear targets for the coming year. Whereas it has bought back about $3.2 billion in stock over the past three years, the company is limiting its share repurchases so as to limit any share dilution, according to its presentation.
Building a new identity
Working to fully execute the integration with Tyco, Johnson Controls will sport a new look for its building efficiency segment. Management expects "building technologies and solutions" to report organic growth between 2% and 4% for fiscal 2017 based on what appears to be a strong order backlog.
The company expects the growth in the segment's top line to work its way down to its bottom line as well. Attributing the forecast segment income improvement to synergies effected by the merger, management estimates that the company will report segment margin expansion between 60 and 80 basis points. Besides the cost synergies, management credits the expected margin expansion to improved sales volume and mix, overall corporate operating efficiency improvements, and reductions in general and administrative spending.
In effect, the growth in the building technologies and solutions segment will be the main driver of what management expects will be earnings before interest and taxes (EBIT) margin expansion before special items of 80 to 110 basis points.
Perspective on power solutions
While the former building efficiency segment is experiencing a transformation as it enters the new fiscal year, the power solutions segment remains the same.
Johnson Controls' company headquarters in Glendale, Wisconsin. Image source: Johnson Controls.
So, what can investors expect? In addition to gaining market share in all regions where it operates, management expects sales of its start-stop batteries to grow by 25% while sales in China grow by 35%. Because of these and other factors, the company expects organic sales to grow between 4% and 6%.
Despite the growth in revenue, the company expects its segment margin -- unlike that of building technologies and solutions -- to stagnate. Management recognizes positive forces affecting the segment margin -- like sales volume and mix and general operating efficiencies -- but they're not enough to withstand mitigating factors like the beginning of construction of a new manufacturing plant in China. Taking a longer perspective, though, management expects margins to expand after 2017 and continue growing into 2020.
Sizing up synergies and such
In emphasizing the value of the merger with Tyco last year, Johnson Controls' management stressed several items. For one, it recognized approximately $650 million in synergies -- $500 million in operational and $150 million in tax. Additionally, it suggested that between the $300 million in productivity from Johnson Controls and $100 million from Tyco, the merger represented a more than $1 billion opportunity, which management estimated would represent about $1 in earnings per share from fiscal 2017 to fiscal 2020.
During the Analyst Day presentation, management upwardly revised those figures, suggesting that the opportunity is closer to something over $1.2 billion, or approximately $1.10 of earnings per share by fiscal 2020. Relating the synergies and other benefits to the upcoming year, management foresees them accounting for about $0.25 of earnings per share.
The takeaway
Clearly, Johnson Controls' management is enthusiastic about its road ahead with the newly integrated Tyco. But enthusiasm and optimism are no substitute for results. Fortunately for investors who follow Johnson Controls, its management has provided great clarity into what it expects in terms of results for the coming year.
It's easy to lose oneself in the numerous facts and figures, but investors who base a Johnson Controls investment on the company's aggressive approach toward seizing the smart building market and the advanced battery market should be reassured by management's presentation. And those with an eye on the company should be compelled to look even further.
