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A Look at a Global Multi Industrial Company

June 18, 2014 | About:
ovenerio

ovenerio

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In this article, let's take a look at Johnson Controls Inc. (JCI), a leading manufacturer of automotive interior systems, automotive batteries and automated building control systems.

Joint Venture and Partnership

Johnson Controls, Hitachi, and Hitachi Appliances announced recently that the companies have signed a non-binding memorandum of understanding for a transaction in which Johnson Controls will obtain a 60% ownership stake in Hitachi Appliances’ global air conditioning business. This partnership will help Johnson Controls become the world's largest commercial air conditioning provider. To identify the relative impact of this driver on the long-term we have to wait because the joint venture is expected to start in 2014, pending necessary approvals.

Further, the company also announced another academic partnership with a Michigan university to advance development of battery and energy storage technology.

Attractive Outlook

If we expect an increase in the units in U.S. light vehicle sales for 2014, as well as gains in emerging markets (China is a fundamental market), should drive global demand growth and this will clearly benefit revenues, profits and cash flows. For example, revenues will benefit from higher automotive production in all its locations compared to the 2013 level, with 11% improvement in China, 6% in North America and 2% in Europe.

The company projects higher sales and consequently higher earnings in fiscal 2014, it expects earnings per share between $3.15 and $3.30 for Fiscal Year 2014. EPS showed an important improvement in the most recent quarter when compared to the same quarter a year ago (191%). During the past fiscal year, earnings of $1.70 were lower than the $1.79 in the prior year, but for this year, Mr. Market expects an improvement in earnings to the level projected by the firm. This is extremely important because with them, they pay for dividends to shareholders and fuel future growth.

Strong Financial Position

As we said above, the firm predicts free cash flow generation (around $1.6 billion) which will provide opportunities for capital expenditures, strategic acquisitions, share repurchases as well as dividend payouts. Recently, the board of directors has authorized a regular quarterly cash dividend of $0.22 per common share (a 16% increased).

Relative Valuation and Price Performance

In terms of valuation, the company sells at a trailing P/E of 26.4x, trading at a discount compared to the industry mean.

Ticker

Company Name

P/E

JCI

Johnson Controls Inc

24.4

LEA

Lear Corp.

16.9

MGA

Magna International Inc.

15.5

RTN

Raytheon Co.

14.7

In the table above we can see that the stock is relatively overvalued when compared to Lear Corp. (LEA), Magna International Inc. (MGA) and Raytheon Co. (14.7).

In the next graph we can see the evolution of the stock price together with EPS. The reason is that earnings often lead the stock price movement. As we can appreciate, the price performance and EPS showed an interesting upward trend in the last five years. A long position of USD 10K five years ago today represents USD 25,867 (which means a 20.9% annual return).

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Final Comment

The obvious question I’m sure you want to know is – Would you recommend this stock? In the article we saw that it has two important deals and an attractive outlook due to improving economy. Moreover, its stock buyback program is a good signal while it wins back investors’ confidence in the stock.

So in this opportunity, I would recommend investors to consider adding the stock for their long-term portfolios.

Hedge fund gurus have also been active in the company in the first quarter of 2014. Paul Tudor Jones (Trades, Portfolio), Steven Cohen (Trades, Portfolio), John Burbank (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio) and the global macro hedge fund founded by Bruce Kovner, Caxton Associates (Trades, Portfolio); and the investment manager HOTCHKIS & WILEY have taken long positions on it.

Disclosure: Omar Venerio holds no position in any stocks mentioned.

About the author:

ovenerio
We provide independent fundamental research and hedge fund and insider trading focused investigation.

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