Johnson Controls, Inc. (NYSE:JCI)

It's time to get comfortable, efficient, safe, and sustainable.

I am no stranger to Johnson Controls (JCI) and until recently I worked there as a sales engineer in their Building Efficiency group, but the familial ties didn't stop there. I also have an uncle who worked in the Automotive Experience Group for some 25+ years until he retired - so I have some history. Since we resigned/retired JCI is off some 65% since we left (The shareholders are mad at us, but you can thank for the tremendous buying opportunity at these lower prices). Needless to say, I've had my eyes on it as an investment opportunity for a long time, but never quite felt comfortable with the price until now.

Big Blue does what? And no we're not talking IBM

JCI is Headquartered in Milwaukee Wisconsin and headed by an experienced management team with Steve Roell at the helm, one of only nine CEOs in 123 years. It's doubtful you've scene the JCI label in your everyday life, but JCI is omnipresent to vehicles and buildings just as good luck is with the Tampa Bay Devil Rays. JCI makes your car seat you sit in, the battery that revs your engine, the other battery that allows for 50 MPG, and even the electronics that operate the butt warmers on cold Milwaukee mornings. At your home or work JCI provides the air conditioner that keeps you cool during the day and the fire, safety, and security systems that keeps you safe at night. You may not know the company, but you know their products.

The Automotive Experience division provided much of the company's growth over the last few decades and represents a little less than half of revenues. Moving forward, growth is sputtering and revenue is flat lining, compact cars are providing compact margins, and necessary restructuring expenses are squeezing out whatever is left. The two up and coming divisions are Power Solutions and Building Efficiency representing 15% and 35% of revenue. Hybrid plug-in technology is growing in prevalence as government mandates for fuel efficiency are realized and customers demand lower energy costs. The Building Efficiency division provides building controls (trust me it's way more complicated than a few thermostats), HVAC equipment, fire life and safety, security, construction, and service capabilities. Johnson Controls has grown their offering through acquisition, business development, and organic sales realizing ever greater synergies (they love that word) with each additional part and are well positioned for nearly unlimited growth over the decades to come.

JCI Controlling the Coffers

Without question the oncoming global slowdown will have a negative affect on all three divisions divisions, but Johnson Controls is well positioned to emerge highly profitable and it's safe to say with a 65% drop in share price that a recession is priced in. JCI has a long standing “A” credit rating, a sustained dividend now yielding 3.5%, strong cash flow, shareholder interest driven growth, and did I mention they've been around since 1885?

In 2008, JCI, a 9B company by market cap, rolled in revenues topping 38B and earnings of 1.6B bringing 12 months trailing earnings yield of 17.5%. Despite the economic head winds and excluding a major restructuring charge (I'll get to that in a minute) the company is still on track to to reach earnings in the neighborhood of 1.2B for 2009. For 2008 free cash flow remained impressive at 850M and according to JCI expectations should stay positive in 2008 at a 500M range (tough recession year, right?).

How much would you pay for air conditioning on a hot and sticky DC afternoon?

The market is implying that JCI, a classic American company will grind out free cash flow growth starting from a base of 500M (2009 company expectations) at about 5% for the next 20 years. In 2010 JCI expects to see benefits from the restructuring charges of about 100M and I believe free cash flow from their will grow 10-20% per year. With a 10% discount rate, a conservative 500M in free cash flow, 15% growth over the next 5 years, 10% growth for the following 5 years and 5% terminal growth the company may be worth as much as $30 a share. Conservatively, if the company's growth were put on hold for three years and it took that long for the price and value to converge at $30 a share the result would be 25% compounded returns, not too shabby.

Risks

There are risks to all three divisions, but the Automotive group is facing the strongest headwinds as major declines in the North American and European auto markets are expected. However, restructuring plans should go along way to to reduce cost, materials, and achieve geographical diversity with more efficient manufacturing. In the wake of today's financial crisis lending for new building construction may slow tremendously, but so far the forecasts for slow to moderate growth are holding. The Power Solutions division sells car batteries maintaining a consistent revenue source and inroads into hybrid technology. However, gas prices are down considerably and overinvestment in hybrid technology may mean more competition and suppressed margins for years.

Foolish Bottom Line

With 123 years of American history in the JCI review mirror the current financial crisis is a mere speed bump along the way to recovery as corrective actions are taken to resume growth. This Milwaukee based industrial leader has excellent management at all levels, provides some of the best products and services in their industry, maintains a reputation for strong consistent growth, and most importantly is well priced given it's balance sheet and future earning potential.

Great long-term value. Since they are tied to automobiles stock has become very cyclical. Value investors should use this to you advantage.

Cyclical stock...I just hope we have a cycle coming. Good bet in an election year.

I discarded this one from my Stock Advisor watchlist, today. I don't think it's a market-beater, though in some respects it's an impressive company. Here are some notes coming from Brendan Mathews on my Stock Advisor team:

Johnson Controls (JCI)
$26/share
$17.9 billion market cap

==Past 1-2 years View==
Johnson Controls could benefit from the recovering economy as car sales increase and cap-ex budgets loosen to include more spending on efficient heating and cooling systems. Over the long-term, demand for Efficient Building should grow as energy becomes more expensive and people become more environmentally aware. The company is already large, so it’s unlikely to double, but it is fairly like to grow 50% over the next five years.

==Key Recent Developments==
Lower European auto production has largely offset recovery in the North American auto markets. Johnson Controls has been forced to restructure its European operations, closing plants and laying-off workers. In the most recent quarter, the company took a large charge to cover the cost of restructuring, which were mostly cash severance payments to European workers.
Weak global market for Building Efficiency, including a 10% down turn in the U.S. institutional market.
A $447 million charge for to bring its pension and healthcare liabilities into compliance with accounting rules.
Management’s said that “softening end markets” and a weak Euro will limit the company’s ability to grow sales and earnings in 2013

==Outlook==
The situation is basically the same – the company still has leadership in its three key markets (auto experience, building efficiency, and batteries). Unfortunately, however, those are all competitive, cyclical markets. If we’ve learned anything over the past year, it’s that building efficiency, which the company hoped would lessen its economic sensitivity, is also highly dependent on the general economy.

==Probability of Beating the Market==
40%. Coming off the bottom of 2009, Johnson Controls grew revenue near 20% in 2010 and 2011 as the economy rebounded. For Johnson Controls to continue growing there will need to be a strong upswing in the economy, which is certainly possible, but doesn’t seem imminent. The company’s scale in multiple markets provides some cushion against economic downturns, but ultimately, this company is heavily-levered to the global economy and GDP growth.

==Our Motley Fool 5-and-3==
5 Potential Green Flags
1. Further interest in “Green Buildings,” spurred by government regulation or increased energy costs
2. Continued growth in the start-stop battery market – expected to grow 5x between 2011 and 2015
3. Resurgence in the global auto market
4. Continued growth in the building efficiency backlog – maintaining a book to bill ratio greater than 1
5. Additional, smart acquisitions in the efficiency and power solutions businesses

3 Potential Red Flags
1. Further weakening in the global auto market or residential and commercial real estate markets
2. Additional contributions to the company’s under-funded pension
3. Increase in the company’s debt level

According to NASDAQ

8 - Hold

5 - Buy

3 - Strong Buy

TRUST THE EXPERTS! WE ARE ALL FOOLS!

Johnson Controls makes car parts. When times are good, people buy new cars so the stock goes up because they are supplying the car manufacturers. In bad times people keep the cars they have, and Johnson provides the parts to keep the old cars running.

Set it and forget it pick here. Grabbing the dividend for CAPS as it comes with a Forward PE of 9.5 and a 5 year PEG of around .65. Roaming slowly back up to its pre-recession price and has a strong future with estimates of $60 billion in revenue possibly within 5 years.

Although slow to compete with the oil companies the Li batteries made by JCI for automobiles will ultimaately become massive.

Search Criteria:

S&P STARS Ranking: = 5 stars (5 is the highest rank out of 5)
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S&P Fair Value Ranking: = 5 (5 = undervalued, 1 = overvalued)

Good solid company, well diversified and can outlast competition.

Strong company, recently moved up in fortune 500 ratings, based alot on housing which should recover

Johnson controls inc -- building efficiency as we potentially head into a recession is a business that can see a lot of growth in the near future if companies are looking for belt tightening.

Strong performer.

Split this year - testing some well-run recent splitters

~60% of their revenue stems from auto industry and it seems like all the bad sentiment has already been discounted in. with that in mind, auto demand will return and with jci's ability to mass produce the batteries required for electric cars, their auto line has tremendous upside potential.

the rest of the revenue stems from building energy efficient systems for buildings. the house of reps just passed a bill that says 20% of electricity by 2020 should be from renewable sources. if this bill is able to make it through without huge changes (and what bill that says green or clean isn't?) the demand for energy efficiency should be huge. i know the university of pennsylvania uses them for all their buildings so they're obviously pretty good. i realize that office building and residential building starts are horrible right now but fortunately only half of efficiency system revenue comes from installations; the rest comes from maintenance. considering this, jci is in a great position to do big things in this growing area.

One of those companies that you can actually buy and hold

This a company that's been around and certainly knows how to maneuver in their business sector. The soon to be 3:1 split certainly indicates it's strength and confidence.

Leading maker of automotive seating and heat controls. Pays solid dividend. Carrier unit represents good global warming play as more will need central AC.

Cheap cheap cheap.