If I told you I know of a company that hasn't missed a single quarterly earnings target this side of the millennium, do you think you could guess its industry? Go ahead, then. I dare you.

Wrong. It's the automotive industry. And the company with this sterling record? That would be Johnson Controls (NYSE:JCI), a maker of auto parts (among other things), which incidentally is reporting its fiscal Q1 2007 numbers on Friday morning. Anyone want to bet on a miss?

What analysts say:

  • Buy, sell, or waffle? Seventeen analysts follow Johnson. All but six of them rate the stock a buy. The remainder say hold.
  • Revenues. On average, the analysts expect to see 11% sales growth to $8.34 billion.
  • Earnings. Profits are predicted to fall 2% to $0.84 per share.

What management says:
"We are pleased to report record sales and earnings for the quarter and the 2006 fiscal year." Not exactly words you'd expect to hear out of an executive in the industry that gave us Dana and Delphi last year, is it? And yet it was none other than Johnson CEO John Barth voicing these words back in November, as he described to investors the bang-up year this auto-parts maker had produced.

What management does:
But as I hinted before, Johnson isn't only an auto-parts maker. It also does "building efficiency" and "power solutions," with the former rising significantly in importance as a result of its purchase of York back in 2005. Still, automotive remains by far the firm's largest business, accounting for 57% of sales and nearly 40% of operating profits over the last 12 months.

The diversification came in the nick of time, just as the auto industry was well and truly cratering (read that last paragraph again, and with some emphasis: 57% of sales, but only 40% of profits). As the construction industry boomed, so too did Johnson's fortunes, and rolling gross, operating, and net margins continue to rise, all up consecutively in each of the last two quarters.

Margins %




























All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
While it's true that margins are climbing, I do see trouble ahead at Johnson. For one thing, on the income statement, the firm has been enjoying the benefit of lower cost of goods sold (COGS) for the last two quarters. With sales up 18% year over year, but COGS up only 16%, gross margins naturally expanded. Unfortunately, little of that expansion made its way to the bottom line, thanks to an explosion of selling, general, and administrative costs -- up 41% year over year for the last six months. Unless the firm gets those operating costs in hand, they're bound to wreak havoc on operating and net margins.

Meanwhile, on the balance sheet, things look similarly bad. Accounts receivable are outpacing sales growth only marginally (20% vs. 18%). But inventories are another matter entirely -- over the last six months, they've been sitting, on average, 83% higher than at similar times last year. If Johnson decides to live up to its name on Friday, this is the line item investors should most want to see the firm get some control over.


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Fool contributor Rich Smith does not own shares of any company named above. The Fool has a disclosure policy.