Note: FLASH REPORT; more details to come, changes are highlighted. Except where noted, and highlighted, no other sections of this report have been updated.
Reason for Report: Flash Update; 2Q18 Earnings
Prev. Ed.: 1Q18 Earnings Update, Mar 12, 2018
On May 1, 2018, Johnson Controls announced its 2Q18 earnings results. The company reported adjusted earnings of 53 cents per share in 2Q18, beating the Zacks Consensus Estimate of 52 cents. Moreover, earnings increased 6% from 50 cents per share registered in 2Q17.
Operational Update
Johnson Controls reported revenues of $7.48 billion, surpassing the Zacks Consensus Estimate of $7.45 billion. Revenues increased 3% year over year.
Cost of sales increased to $5.26 billion from $4.99 billion in 2Q17. Gross profit decreased to $2.22 billion from $2.28 billion in 2Q17.
Selling, general and administrative expenses in 2Q18 totaled $1.59 billion, decreasing from 2Q17 figure of $1.73 billion.
Segment Results
Building Technologies & Solutions: This segment’s adjusted revenues were $5.63 billion, increasing from the year-ago quarter figure of $5.54 billion.
Segment EBITA increased to $630 million from $628 million in 2Q17.
Power Solutions: Adjusted revenues in this segment increased to $1.86 billion from $1.70 billion in 2Q17. Segment EBITA was $314 million, up from 2Q17 figure of $303 million.
Financial Position
Johnson Controls had cash and cash equivalents of $268 million as of Mar 31, 2018, increasing from $321 million as of Sep 30, 2017. Long-term debt declined to $11 billion in the quarter from $12 billion as of Sep 30, 2017.
In 2Q18, the company repurchased 1.3 million shares for $50 million.
Guidance
Johnson Controls reaffirms adjusted EPS guidance for fiscal 2018 at $2.75-$2.85.
MORE DETAILS WILL COME IN THE IMMINENT EDITIONS OF ZACKS RD REPORTS ON JCI
June 1, 2017
Portfolio Manager Executive Summary[Note: Only highlighted material has been changed.]
Johnson Controls International plc (Johnson Controls or the company) is a global multi-industrial company that offers diversified technology. Its offering includes intelligent building products and systems for both commercial and residential customers plus efficient energy technologies among others. Employing about 121,000 people worldwide, it serves customers in more than 150 countries.
Of the 15 firms in the Zacks Digest group covering the stock, 10 assigned neutral ratings and five conferredpositive ratings. Also, 10 of these brokerage firms provided target prices.
Neutral or equivalent outlook (66.7%; 10/15 firms):These firms expect that Johnson Controls’ merger with Tyco has several strategic positives, synergy benefits and will strengthen the brands’ position in the market. However, the consolidation is expected to reduce financial flexibility and limit the share repurchases and acquisitions in the first few years post the merger. In the Building Efficiency segment, they expect thatcombining the heating, ventilation and air conditioning equipment and fire & security systems and products will offer a wide product portfolio for both housing and commercial customers. In the Power Solutions division, these firms are optimistic aboutthe company’s potential for market penetration in the emerging marketsdue to its leading battery technologies.However, the sluggish market growth in the United States, slowdown in China’s construction market and acquisition-related separation costs might adversely affect Johnson Controls’ results. In 2018, the firms also expect raw material prices to soar, including that of lead, which is the main component of battery production, thus hurting its profit margins.
Positive or equivalent outlook (33.3%; 5/15firms):Some of the bullish firms believe that Johnson Controls’ merger with Tyco is expected to increase the company’s profits and will also improve its operational efficiencies. Also,Johnson Controls’Power Solutions segment offering lithium-ion battery technology is expected to perform well even during the period of low vehicle sales as it offers replacement batteries. Further, the segments’ capabilityto manufacture batteries at lower costs helps it generate high-profit margins.Moreover, the recent focus on energy efficient and safety products for vehicles will increase the demand forits building automation and control solutions, thereby benefitting the company.
Mar 12, 2018
Overview[Note: Only highlighted material has been changed.]
Johnson Controls, headquartered in Cork, Ireland, is a supplier of intelligent buildings, efficient energy solutions, integrated infrastructure and next-generation transportation systems. It operates through twobusinesses namely, Building Efficiency and Power Solutions.
In October 2016, the company completed the spin-off of its Automotive Experience business under the name Adient plc, which is currently trading under the ticker symbol (ADNT).
Building Technologies & Solutions: This segment engages in the development, manufacturing and installation of building products and systems. Its products include heating, ventilating and air conditioning (HVAC)equipment and controls,fire detection systems and fire suppression solutions.
Power Solutions: Globally, the Power Solutions segment is a leading supplier of lead-acid automotive batteries for passenger cars, light trucks and utility vehicles. Its customers are original equipment manufacturers as well as vehicle-battery aftermarket.
Johnson Controlshas its corporate offices in North America, Europe and the Asia-Pacific region.
Key investment considerations identified by the brokerage firms are as follows:
Key Positive Arguments / Key Negative Arguments- Johnson Controls’ sizeable market share provides protection against excessive industry pricing pressures.
- Johnson Controls’ cost-control initiatives and enhanced production efficiency are expected to drive margins.
- Johnson Controls should benefit from the growing popularity of start-stop vehicles over the years.
- Johnson Controls expects to benefit from themerger with Tyco and its increased focus in the emerging markets of Brazil, Mexico and China over the long term.
- Sluggish demand in some of the company’s key markets and a weak euro are headwinds for the company’s earnings growth.
- Incremental costs associated with new businesses can exert pressure on the company’s margins.
- The company uses significant amounts of aluminum, steel, lead, copper and petroleum-based products. A sharp rise in prices of these raw materials can affect the company’s profits.
- Johnson Controls faces a strong competition from major domestic and international manufacturers and distributors of lead-acid batteries.
Further information on the company can be found at
son Controls’ fiscal year ends on Sep 30.
Mar 12, 2018
Long-Term Growth[Note: Only highlighted material has been changed.]
Johnson Controls’ battery business is set to grow on the back of new hybrid wins. Also, the company is adding capacity to meet demand. The acquisition of the Delphi global battery business provided Johnson Controls with a stronger foothold in the business. It will enable the company to participate in the rapidly-growing Asian automotive battery market.
In November 2017, Johnson Controls announced that it will unveil 11 new Absorbent Glass Mat (AGM) battery group sizes for electrical and stop-start vehicles. Further, with an expectation that the demand for batteries will rise, the company will be investing more than $780 million between 2015 and 2020 in order to develop the AGM battery technology and build manufacturing capacity for the same.
Currently, Johnson Controls is the leading supplier of Start-Stop batteries in Europe through its VARTA brand. The company anticipates significant growth opportunities in China. As a result, Johnson Controls will invest in the Chinese market this year. In June 2016, the company reported plans to form a joint venture (JV) with Binzhou Bohai Piston Co., Ltd., to build a new automotive battery manufacturing plant in China. This will be Johnson Controls’ fourth such plant in the world’s largest automobile market.
The $200 million plant will be located at Binzhou in the Shandong Province. Construction of the facility will start in 2017 and production is expected to commence in 2019. The plant will manufacture both conventional flooded and AGM battery technologies, and serve automakers as well as aftermarket customers. Its production capacity is estimated to be around 7.5 million batteries per year. In Aug 2015, Johnson Controls announced plans to construct a new automotive battery manufacturing facility in the Tiexi District of Shenyang in northeast China. This $200 million facility will have a production capacity of 6 million automotive batteries a year. The plant construction started in 2016 and production is scheduled to commence in 2018. The facility will mainly produce batteries for Start-Stop vehicles.
Johnson Controls is gaining strategic contracts which are aiding its business expansion. In February 2016, it signed a $15 million energy performance contract with Arkansas State University. This contract will support the university's sustainability initiatives related to improvements inlighting, water conservation, waste management, energy management, HVAC and utility monitoring systems. The company completed its JV agreement with Hitachi, Ltd. and Hitachi Appliances, Inc in October 2015. The JV started operating as Johnson Controls-Hitachi Air Conditioning with immediate effect. The entity provides a full range of world-class air conditioning products and technologies to global customers. Johnson Controls has 60% ownership ofJohnson Controls-Hitachi Air Conditioning. With this JV, the company expects to have the most solid technology portfolio in the HVAC and refrigeration industry.
Johnson Controls faces fiercecompetition from the major U.S. and non-U.S. manufacturers and distributors of lead-acid batteries. The North American, European and Asian lead-acid battery markets are highly competitive.
The brokerage firms are confident about the company’s business model strength. According to the firms, revenue growth would benefit from secular opportunities. These firms believe that free cash used for acquisitions will generate a sustainable return on capital, leading to future growth.
Johnson Controls expects adjusted earnings per share to increase at a CAGR of 12% to 15% till fiscal 2020. Organic revenues CAGR, including $500 million run-rate sales synergies,are projected at 3-4%.EBIT margin is projected to expand by 300 to 380 basis points. In addition, the company expects to achieve $150 million of tax synergies along with cost savings of around $1 billion from the benefits of the merger and improved productivity.
Mar 12, 2018
Dec 27 20
Target Price/Valuation[Note: Only highlighted material has been changed.]
Provided below is a summary of target price/valuation as compiled by Zacks Digest:
Rating DistributionPositive / 33.3%↓
Neutral / 66.7%↑
Negative / 0%
Avg. Target Price / $45.2↓
Digest High / $51
Digest Low / $41
Upside from Current / 16.7%
No. of Analysts with Target Price/Total / 10↑/15↑
Risks to the target price include a very slow economic recovery, inefficient cost management, a steep rise in raw material prices, notably steel, resin and lead, uncertainty associated with auto sales in the United States and the European markets, slowdown in residential and non-residential construction markets, intense competition and lack of proper government support.
Mar 12, 2018
Recent Events[Note: Only highlighted material has been changed.]
On Mar 12, 2018, Johnson Controlsannounced to mull over strategic alternatives for the Power Solutions unit that produces advanced battery technology solutions for vehicles.
On Mar 7, 2018, Johnson Controls announced a quarterly cash dividend of 26 cents to its shareholder. The amount will be paid on Apr 13 to shareholders of record Mar 19.
On Jan 31, 2018,Johnson Controls announced its 1Q18(endedDec 31, 2017) financial results. The adjusted earnings per share were 54cents in1Q18, beating the Zacks Consensus Estimate of 51 cents.
Revenues[Note: Only highlighted material has been changed.]
In 1Q18, Johnson Controls reported revenues of $7.44billion, up 5% year over year from $7.1 billion in 1Q17.The top linewas almost in line with the Zacks Consensus Estimate.
Segment Details
Building Efficiency: At this segment, adjusted revenues came in at $5.3 billion, from$5.2 billion in 1Q17.
Power Solutions: Adjusted revenues at the Power Solutions segment were $2.13 billion, an improvement from $1.9 billion in 1Q17. Excluding the impact of foreign exchange and higher lead pass-through costs, organic sales rose 1% year over year.
Outlook
The company is focusing on organic revenue growth and expects FY18 sales of $30.1-$30.7 billion, assuming low-single-digit organic growth. The figure includes a $265 million tailwind from foreign currency.
Per cautious firms,Power Solutions’ battery technologies might drive the company’s revenues. However, witnessing the continued underperformance by the fire and safety solution, it seems that the same might continue in this fiscal as well, thus partly offsetting the company’s top line.
The company completed the spin-off of the automotive business. Thus Johnson Control nowhas exposure in the auto industry only through its vehicle batteries. Johnson Controls enjoys a leading position in the car battery market. Nonetheless, its divestiture and spin-off areexpected to adversely affect revenues. These firms also expect the Building Efficiency division to benefit from the company’s increased focus on the industrial sector. The firms expect the performance contracting business to continue facing a lack of momentum in the conversion of project awards.
Provided below is a summary of revenues as compiled by Zacks Research Digest:
Revenue ($M) / 1Q17A / 4Q17A / FY17A / 1Q18A / 2Q18E / FY18E / FY19EBuilding Efficiency (TYCO) / $5,196 / $6,004 / $22,801 / $5,305↑ / $5,643.6 / $23,264.2↑ / $24,096.4↑
Power Solution / $1,900 / $2,132 / $7,337 / $2,130↑ / $1,848.6 / $7,891.2↑ / $8,180↑
Total Revenue / $7,096 / $8,136 / $30,138 / $7,435↑ / $7,492.2 / $30,840.9↑ / $31,855.2↑
Digest High / $7,096 / $8,136 / $30,138 / $7,435 / $7,492.2 / $31,181.8 / $32,264.4↑
Digest Low / $7,096 / $8,136 / $30,138 / $7,435 / $7,492.2 / $30,500 / $31,446↑
Digest YoY Growth / 4.9%↑ / 2.6% / 3%
Digest Sequential Growth / 5.9% / -8.6%↑
Note: Blank cells indicate that brokers have not provided any estimates.
Highlights from the revenues table are as follows:
- For FY18, the revenues estimates average lies at around $30,500-$31,181.8 with an average of$30,841 (↑ from the previous estimates of $30,419.1).
- For FY19, the revenues estimates average lies within $31,446-$32,264.4 with an average of $31,855.2(↑ from the past projection of $31,423.9).
Please refer to the Zacks Research Digest spreadsheet on JCI for more details on revenues estimates.
Margins[Note: Only highlighted material has been changed.]
Cost of salesincreased to $5.27 billion from $4.97 billion in 1Q17. Gross profit rose to $2.17 billion from $2.11billion a year ago.
Selling, general and administrative expenses in 1Q18 totaled $1.42 billion, down from the prior-year quarter figure of $1.57 billion.
Outlook
Per the bullish firms, Johnson Controls’ margins from the Building Efficiency business will improve on the back of an improving product mix, cost synergies, operational enhancements and expansion in the emerging markets.The firms expect margins from the Powertrain business to increase on the back of rising sales of higher-margin AGM batteries, capacity expansion in the emerging markets and benefits from vertical integration.
According to the firms with a neutral stance, margin expansion is expected to be driven by benefits from Johnson Controls' recent efforts to shift its focus toward a more multi-industrial format. The firms think that the company’s margins may expand in the future due to the spin-off of the automotive business, the lowest margin generator among Johnson Controls' portfolio. Focus on improving operational efficiency and integration with Tyco business will further boost profits.However, a rise in raw material cost, including lead, might hurt its profit margins.
Provided below is a summary of margins as compiled by Zacks Research Digest:
Margin / 1Q17A / 4Q17A / FY17A / 1Q18A / 2Q18E / FY18E / FY19EGross / 31.2% / 30.1% / 31% / 29.2%↓ / 29.6% / 30.6%↓ / 31.6%↓
Operating / 10.7% / 13.9% / 11.9% / 10.1%↓ / 9.6% / 12%↓ / 12.8%↓
Pre-Tax / 9% / 12.4% / 10.4% / 8.5%↓ / 8% / 10.5%↓ / 11.3%↓
Net / 7.6% / 10.6% / 8.8% / 7.3%↓ / 6.9% / 9%↓ / 9.4%↓
Please refer to the Zacks Research Digest spreadsheet on JCI for more details on margins estimates.
Earnings per Share[Note: Only highlighted material has been changed.]
Johnson Controls posted adjusted earnings of 54 cents per share in 1Q18 (endedDec 31, 2017),surpassingthe Zacks Consensus Estimate. Also,the bottom line increased 2% from 53 centsearned in 1Q17.
Outlook
ForFY18, Johnson Controls reiterated its adjusted EPS to bewithin $2.75-$2.85, reflecting a year-over-year increase of 6-10%.
Both bullish and cautious firms expect earnings to grow over the next several years with improving margins offsetting lower revenues. Buildings and Power Solutions businesses are expected to drive growth that represents a market opportunity in excess of $400 billion.
Provided below is a summary of EPS as compiled by the Zacks Research Digest:
EPS / 1Q17A / 4Q17A / FY17A / 1Q18A / 2Q18E / FY18E / FY19EDigest High / $0.53 / $0.87 / $2.61 / $0.54↑ / $0.54 / $2.8↓ / $3.2
Digest Low / $0.52 / $0.86 / $2.6 / $0.54↑ / $0.52 / $2.77 / $3↓
Digest Avg. / $0.53 / $0.87 / $2.6 / $0.54↑ / $0.53 / $2.78↓ / $3.07↓
YoY Growth / 10.2% / 13.4% / 12.6% / 1.8%↑ / 6.2% / 6.9%↓ / 10.4%↓
QoQ Growth / -30.8% / 22.2% / -37.8%↑ / -1.7%
Note: Blank cells indicate that brokers have not provided any estimates.
Highlights from the EPS table are as follows:
- For FY18, the EPS forecasts $2.77-$2.8 with an average of $2.78 (↓from the previous average of $2.82).
- For FY19, the EPS forecasts $3.2-$3 cents with an average of $3.07 (↓from the previous average of $3.12).
Please refer to the Zacks Research Digest spreadsheet on JCI for more details on EPS estimates.
Mar 12, 2018
Analyst / Sanjoy DeCopy Editor / NA
Content Ed. / Sanjoy De
Lead Analyst / Sanjoy De
QCA / Anindya Barman
No. of brokers reported/Total brokers / NA
Reason for Update / 2Q18Flash Update
Zacks Investment ResearchPage 1