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Analyst Blog

On Jan 21, we maintained our Neutral recommendation on Johnson Controls Inc. factoring in the opportunities from its focus on China and benefit from new hybrid battery business. However, the company’s earnings fell in the first quarter of fiscal 2013 (ended Dec 31, 2012) and it remains exposed to pricing pressure from OEMs and strong competition.

Why Maintained?

Johnson Controls, on Jan 18, posted a 16.1% fall in earnings in the first quarter to 52 cents per share from 62 cents in the same quarter last year as global demand for its products weakened. However, the results surpassed the Zacks Consensus Estimate by a penny. Net income declined 16.5% to $354 million from $424 million in the first quarter of fiscal 2012.

Revenues in the quarter were flat at $10.4 billion, but exceeded the Zacks Consensus Estimate of $10.2 billion. Revenues remain unchanged as the benefit from strong business backlog was offset by weak demand across the globe, especially in Europe.

Following the release of the first quarter results, the Zacks Consensus Estimate for 2013 went down by 1.1% to $2.61 per share. Meanwhile, the Zacks Consensus Estimate for 2014 declined 1.9% to $3.15 per share. While the Zacks Consensus Estimates for both fiscal 2013 and 2014 are declining, the company maintains a Zacks Rank #3 (Hold).

Johnson Control’s battery business will benefit from rising demand for new hybrid batteries. The company is the leading supplier of Start-Stop batteries in Europe with its VARTA brand and it expects that market for Start-Stop batteries will grow to 35 million units by 2015.

The company will also benefit from the focus on China. Johnson Controls occupies 50% market share in seating business in China. The company has invested $500 million in four automotive battery plants in Shanghai, which will produce 30 million batteries by 2015.

However, the company faces pricing pressures from OEMs due to their high inventory levels. In addition, volatility in commodity cost and strong competition from major domestic and international manufacturers and distributors of lead-acid batteries could affect the company’s profitability.

Other Stocks to Look For

Commercial Vehicle Group Inc. , Oshkosh Corporation and Allison Transmission Holdings, Inc. are performing well in the same industry, where Johnson Controls operates. While Commercial Vehicle Group is a Zacks Rank #1 (Strong Buy) stock, Oshkosh Corporation and Allison Transmission are Zacks Rank #2 (Buy) stocks.

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