We have downgraded our long-term recommendation on
Johnson Controls Inc.
) to Underperform. The leading supplier of automotive interiors,
batteries and other control equipment is facing challenges from the
softness in the global markets along with weak euro, which will
affect its profitability. Pricing pressure from OEMs and strong
competition also contributed towards the rating downgrade.
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The company is facing continued pricing pressure from OEMs due to
their high levels of inventory. In addition, volatility in
commodity prices of steel, aluminum, copper and fuel in the
Building Efficiency business and lead in the Power Solutions
business will impair the company's profitability.
Johnson Controls faces tough competition from major domestic and
international manufacturers and distributors of lead-acid batteries
in the North American, European and Asian markets. Its main
) in the Automotive Experience segment,
Honeywell International Inc.
) in the Building Efficiency segment and
) in the Power Solutions segment. In addition, weak demand in the
key markets along with a weak euro can also be detrimental to the
Meanwhile, Johnson Controls is launching new hybrid batteries along
with the expansion of its capacity to meet the rising demand.
Concurrently, the company is expanding its foothold with the
acquisition of the Delphi global battery business. In addition, the
company is the leading supplier of start-stop batteries in Europe.
Johnson Controls expects the market for start-stop batteries to
grow to 35 million units by 2015.
The company expects to benefit from its expansion in China. In the
seating business, it commands more than 50% of the country's market
share. Further, the company has invested $500 million in four
automotive battery plants in and around Shanghai which will have an
annual production capacity of 30 million batteries by 2015.
Johnson Controls, in the third quarter of its fiscal year ending
September 30, 2012, registered a 14% increase in adjusted earnings
per share to 64 cents from 56 cents in the corresponding quarter a
year ago. However, the results missed the Zacks Consensus Estimate
by 3 cents. Profit grew 15% to $441 million from $383 million in
the comparable quarter of prior year.
Total revenues rose 2% year over year to $10.6 billion in the
quarter. However, revenues failed to meet the Zacks Consensus
Estimate of $10.9 billion.
Our recommendation on the stock is backed by a Zacks #4 Rank, which
translates into a short-term (1 to 3 months) Sell rating.