Johnson Controls International PLC (JCI, Financial) manufactures automotive interior systems, automotive batteries and automated building control systems. In 2016, the company merged with Tyco International and, as a result, expects to profit from future synergies. More than $1 billion is expected over the next three years.
Due to the spinoff of Adient PLC (ADNT, Financial) and the merger with Tyco, Johnson Controls has become a more independent company to business cycles and more profitable due to synergies.
Looking at profitability, second-quarter revenues increased 53.1% year over year to $7.3 billion and adjusted earnings per share of 50 cents increased 11% from the comparable quarter of 2016. Both figures beat consensus estimates by $160 million and one cent. Accoridng to GuruFocus, the company's operating margin has expanded over the past 10 years, surpassing the industry median.
The power solutions segment manufactures more than 150 million lead-acid batteries per annum, capturing about one-third of the global market share. Besides being the leading supplier in North and South America and Europe, it is the third-largest supplier in China.
Looking forward, the company is planning to reduce operating costs (about $1billion) and tax savings (about $150 million) to improve profitability.
Dividends
Dividends and share buybacks are the primary methods of returning cash to shareholders. The dividend yield is 2.44%, which is considered to be quite good for protecting consumer´s purchasing power. Dividends have been paid since 1887. In the past 13 years, the highest trailing annual dividend yield was 6.36%, the lowest was 1.14% and the median was 2.14%. The dividend yield is currently close to a two-year low.
Relative valuation and price performance
In terms of valuation, the stock sells at a forward price-earnings (P/E) rato of 13.4 times. Its price-book (P/B) ratio of 2.08 times indicates a premium versus the industry average of 1.41 times. The price-sales (P/S) ratio of 0.97 times is below the industry average of 1.13 times and is close to a 10-year high.
The chart below illustrates the stock price's upward trend over a five-year period. Shareholders who invested $10,000 five years ago could have $21,819 today, which represents a 16%.9 compound annual growth rate (CAGR).
As of the end of March, Barrow, Hanley, Mewhinney& Strauss is one of the largest shareholders of the company. The fund holds 40.09 million shares of the company, a holding valued at $1.69 billion. The position represents 2.54% of the equity portfolio. Hedge fund sentiment was positive in the first quarter, with 86 funds creating new positions and 304 funds adding to existing positions. In contrast, 114 funds closed out their positions and 282 funds reduced their holdings. Overall, the change in shares from the previous quarter was 1.45%.
Final comment
The company has a competitive advantage over its peers with its strong power solutions segment and customer base. Further, Johnson Controls produces low-cost but high-quality products. The Tyco business' products complemented its existing pipeline, creating a unique brand portfolio.
Disclosure: Author holds no position in any stocks mentioned.
