Based in Milwaukee, Wisconsin, Johnson Controls (JCI, Financial) is arguably one of the most diversified industrial firms in its sector and even in the S&P 500. It operates three core segments: the building efficiency segment, the automotive segment, and power solutions segment.
History
- 1885: Johnson Electric Service Company founded by Warren Johnson
- 1887: The company pays its first dividend
- 1910: Johnson Controls enters the European market
- 1966: The company's sales exceed $100 million
- 1978: Acquired Globe-Union, Inc. and entered the automotive battery market
- 1992: The company's sales exceed $5 billion
- 1996: Acquired Prince Automotive and significantly expanded its automotive segment
- 2004: The company increased its dividend for the 30th consecutive year
- 2013: Alex Molinaroli named CEO - the 10th CEO in 128 years
Business
Johnson Controls operates three core segments. Its building efficiency segment is a $14.6 billion business that sells controls and services for heating, ventilation, and air conditioning systems. This segment has seen dwindling growth in North America and Europe, but growth opportunites in Asia, especially China, have more than compensated for the recent struggles in developed markets. Although revenues dipped slightly in the past year, the segment's income increased by 9%, suggesting that management is focused on cost reduction.
| 2013 Sales | 2012 Sales | Change | 2013 Income | 2012 Income | Change |
| $ 14,591 | $ 14,715 | -1% | $ 988 | $ 910 | +9% |
The automotive segment is a $21.8 billion business that specializes in interior seating and electronics. Despite being one of the market leaders in this segment and recent acquisitions of profitable businesses in this segment, Johnson Controls recently announced that it would spin off this segment into a joint venture with China's Yangfeng Automotive Trim Systems. Johnson Controls owns about 30% of this joint venture. The idea behind this strategic move was to focus on businesses with higher margins. I expect this move to signifcantly enhance the company's long-term prospects moving forward. Margin expansion should improve the firm's valuation.
| 2013 Sales | 2012 Sales | Change | 2013 Income | 2012 Income | Change |
| $ 21,781 | $ 21,334 | +2% | $ 1,299 | $ 803 | +62% |
The power solutions segment is a $6.4 billion segment that specializes in producing batteries. In fact, Johnson Controls is a leader in producing lead acid batteries, and this should not change in the near future.
| 2013 Sales | 2012 Sales | Change | 2013 Income | 2012 Income | Change |
| $ 6,358 | $ 5,906 | +8% | $ 1,006 | $ 784 | +28% |
Management
Johnson Controls has had ten CEOs in the past 128 years. This illustrates that the firm is able to employ consistent, long-term focused executives who maintain the goals set forth by the company. Alex Molinaroli was named the CEO in 2013.
Since the financial crisis, institutional ownership has remained stable around 80%. This is a good indicator because large, sophisticated investors are optimistic about the firm's long-term prospects.
Financial Strength
Johnson Controls enjoys a healthy balance sheet and phenomenal financial strength. This fact is most evident in its dividend history. Perhaps the most impressive aspect of this company is its dividend policy. The company has paid a dividend to its shareholders every year since 1887! It also increased its dividend every year from 1975 to 2008 (not in 2009 because of the financial crisis) and continued that increase in 2010. Therefore, Johnson Controls has shown that it is a consistent dividend payer, and I expect this trend to continue into the future. The following charts illustrates the firm's earnings per share and dividends per share. Notice the gradual, consistent increase in dividends per share.
Additionally, Johnson Controls has a interest coverage ratio of 11 and a total equity-to-total assets ratio of .37, both indicators of strong financials.
Valuation
Johnson Controls has a P/E ratio (TTM) of 23.5, slightly above the industry average. However, relative to its history, the company looks much cheaper. Adding in the fact that the company is switching into higher margins, I believe that the current P/E ratio is appropriate. Taking out capital structure, Johnson Controls has a Enterprise Value to EBIT ratio of 11.9. This is a significant improvement compared to its recent history.
In addition, the company employs a dividend yield of 1.8%, slightly above the industry average. Despite being slightly above average, investors can be sure that the amount of the dividend will increase consistently every year. Johnson Controls is not the cheapest company in its industry, but it is cheap enough to justify buying shares given its long-term growth prospects.
Risks
Europe is currently Johnson Controls' greatest concerns, especially in the automotive business. Broadly speaking, the company is exposed to the cyclical auto industry in all its geographic regions. Demand has weakened in developed markets relative to emerging markets, so Johnson Controls needs to intensify its efforts countries like China in order to make up for modest revenues in North American and Europe.
In addition, company management is optismistic about its future in the lead acid battery market, but there is still concern as to whether or not Johnson Controls can remain one of the market leaders in this relatively untapped market.
Outlook
Johnson Controls is a long-term buy, and it should remain in investors' portfolios for a very long time. Investors should ignore the cyclical movements of the stock market and know that the Johnson Controls is becoming much more efficient. It is now focusing on higher margin markets and spinning off its lower margin segments. I am very optismistic about the company's future.
