Johnson Controls Inc. Earnings: Will Its Strategic Shift Help It Grow?

On Friday, Johnson Controls (JCI 1.72%) will release its quarterly report, and investors have enjoyed watching the stock double over the past year and a half as strength in the auto industry has helped the parts-maker grow. Yet with the sale of its automotive electronics business to Visteon (VC 2.06%) and with the spin-off of a joint venture that holds its auto-interiors business, Johnson Controls is refocusing on other areas like building efficiency, going up against United Technologies (UTX 0.25%) and similarly large competitors.

For years, Johnson Controls has been a giant in the automotive industry, providing parts and components for vehicles of many different makes and models. But the auto industry is highly cyclical, and the impact on Johnson Controls' earnings has included many ups and downs as a result. In order to try to smooth out its earnings and get less exposure to cyclical fluctuations, Johnson Controls has moved forward with emphasizing its other core businesses. Let's take an early look at what's been happening with Johnson Controls over the past quarter and what we're likely to see in its report.

Source: Johnson Controls.

Stats on Johnson Controls

Source: Yahoo! Finance.

Will Johnson Controls earnings keep growing?
In recent months, investors have pared their views on Johnson Controls earnings, cutting June-quarter estimates by $0.03 per share and reducing current and next year's projections by triple that amount. The stock has kept climbing, though, with a rise of 10% since mid-April.

Source: Johnson Controls.

Johnson Controls' fiscal second-quarter earnings report showed that the company has continued to rely on the auto side of its business for growth. Overall revenue climbed 4% from year-ago levels, producing a better than 50% gain in earnings per share from continuing operations. Yet while the auto segment produced strong growth of 11% from the previous year, the building efficiency business saw sales fall 5%, as the company cited lower demand in North America, Europe, and the Middle East that offset better performance in Asia. Still, even with lower revenue, Building Efficiency boosted its income by 9%, with cost reductions helping to boost margins. The power solutions segment also struggled, with flat revenue and falling income.

One of the most frustrating things about Johnson Controls' building efficiency segment is that competitors have seen better results recently. United Technologies and its UTC/Carrier segment has extensive exposure to industry conditions and has generally performed well, and smaller sellers of HVAC systems have managed to grow their revenue recently. Seasonally, building efficiency products typically see greater demand in the spring and summer quarters, and Johnson Controls hopes that improving weather conditions will spur greater investment in systems from its customers.

Nevertheless, Johnson Controls' recent moves all emphasize its shift away from autos. The company closed the sale of its automotive electronics business to Visteon less than a month ago, and its decision to create a joint venture for its automotive interiors business with a Shanghai Automotive affiliate demonstrates its further desire to refocus its efforts on its other core segments. Meanwhile, in June, Johnson Controls completed its deal to buy Air Distribution Technologies in a $1.6 billion buyout that boosts its exposure to air distribution and ventilation products.

In the Johnson Controls earnings report, watch to see how the company's management positions recent moves as part of its longer-term strategy. If the commercial construction industry starts to take off in the U.S. and other parts of the world, then Johnson Controls' shift toward building efficiency could prove to have been an inspired and forward-thinking move.

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