In this article, let's take a look at Johnson Controls Inc. (JCI, Financial), a leading manufacturer of automotive interior systems, automotive batteries and automated building control systems.
Tax-free spinoff
The company diversifies its business and actually is three companies in one. The automotive segment contributed a little more than a half of fiscal 2014 sales, decreasing for previous levels, so this shows the company's diversification. We believe this trend will continue, with diversification in geography, products and customers. The building efficiency is crucial and its growth could offset the downturns in the automotive segment. In fiscal 2014, building efficiency contributed to 33% of sales compared with 21% in fiscal 2005.
On Friday, the firm said it planned to spin off its $22 billion automotive operations in the next 12 months. As a consequence, shares fell 4.5% to $44.24, and the deal is expected to be completed before fiscal 2016 year end. This move is part of a reshaping of the group. Mr. Alex Molinaroli said, “At the same time, Johnson Controls will move forward with our multi-industrial strategies and make investments in our core growth platforms around buildings and energy storage.”
Greenblatt's position
As of the end of March 2015, Joel Greenblatt (Trades, Portfolio) is the second-largest shareholder of the firm. Greenblatt´s fund holds 1.55 million shares of the company valued at $78.25 million. The position represents 0.59% of the equity portfolio and ended bullish at the end of the quarter with an increase of 57%.
Dividends
Dividends and share buybacks are the primary sources of returning cash to shareholders. The dividend yield is 2.4% which is considered quite good to protect consumer´s purchasing power. Dividends have been paid since 1887. During the past 13 years, the highest trailing annual dividend yield was 5.70%, the lowest was 1.02% and the median was 1.72%. Now, the stock dividend yield is close to 2-year high so this is attractive for dividend investors.
The company has reduced its long-term debt to capital ratio while maintaining cash and cash equivalents of $213 million as of June 30, 2015.
Revenues, margins and profitability
Looking at profitability, revenues declined by 2.3% but earnings per share increased in the third quarter compared to the same quarter a year ago ($0.91 vs $0.79).
The operating margin is expanding which is a good sign, at 5.95% surpassing the industry median of 4.72%.
Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.
| Ticker | Company Name | ROE (%) |
| JCI | Jonhson Controls Inc | 13.53 |
| LEA | Lear Corp. | 23.04 |
| MGA | Magna International Inc. | 21.65 |
| RTN | Raytheon Co. | 20.39 |
| Ă‚ | Industry Median | 9.05 |
The company has a current ROE of 13.53% which is lower than the industry median but lower than the ones exhibit by Raytheon (RTN, Financial) and Magna International (MGA, Financial). In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So for investors looking those levels or more, Lear Corp. (LEA, Financial) could be the option. It is very important to understand this metric before investing and it is important to look at the trend in ROE over time.
| Quarter Ended | Dec12 | Mar-13 | Jun-13 | Sep-13 | Dec13 | Mar-14 | Jun-14 | Sep-14 | Dec14 | Mar-15 |
| ROE (%) | 12.19 | 5.51 | 18.27 | 3.43 | 15.73 | 8.99 | 5.99 | 10.69 | 18.32 | 19.77 |
Relative valuation and price performance
In terms of valuation, the stock sells at a trailing P/E of 19.4x, trading at a premium compared to an average of 16.4x for the industry. To use another metric, its price-to-book ratio of 2.74x indicates a premium versus the industry average of 1.58x while the price-to-sales ratio of 0.71x is above the industry average of 0.70x.
As we can see in the next chart, the stock price has an upward trend in the five-year period. If you had invested $10,000 five years ago, today you could have $16.834, which represents a 11% compound annual growth rate (CAGR).
Final comment
The company is making changes to its portfolio in order to gain growth in the future and increased value for shareholders. Regardless of the drop in revenue, the company managed to increase its EPS, so in this opportunity, I would recommend investors consider adding the stock for their long-term portfolios.
Manning & Napier Advisors, Inc., initiated a new position on the stock with 74,210 shares in the second quarter of 2015.
Disclosure: Omar Venerio holds no position in any stocks mentioned.
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