Macquarie Upgrades Johnson Controls to ‘Outperform’

Johnson Controls (JCI) has a market cap of $30.9 billion. It rose by 1.4% to close at $47.86 per share on September 8, 2016. The stock’s weekly, monthly, and year-to-date (or YTD) price movements were -0.07%, -2.4%, and 40.0%, respectively, on the same day. JCI is trading 1.3% below its 20-day moving average, 0.38% below its 50-day moving average, and 15.6% above its 200-day moving average.

The Vanguard Large-Cap ETF (VV) invests 0.15% of its holdings in Johnson Controls. The ETF tracks a market-cap-weighted index that covers 85% of the market capitalization of the US equity market. The YTD price movement of VV was 8.2% on September 8.

The market caps of Johnson Controls’ competitors are as follows:

• Honeywell International (HON) — $86.9 billion
• Raytheon (RTN) — $41.2 billion
• Lear (LEA) — $8.5 billion

Macquarie has upgraded Johnson Controls’ rating to “outperform” from “neutral” and set the stock price target at $55.0 per share. On September 6, 2016, RBC Capital initiated the coverage of Johnson Controls as “sector perform” and set the price target at $50 per share.

In a press release on September 8, 2016, Johnson Controls “announced its board of directors has approved the previously announced spin-off of its global automotive seating and interiors business. The transaction will result in two independent, publicly traded companies: Johnson Controls International plc and Adient plc. The spin-off is expected to be completed on Oct. 31, 2016.”

It added that “the separation will occur by means of the declaration of a dividend in specie of the automotive seating and interiors business, to be effected by the transfer of the automotive seating and interiors business from Johnson Controls to Adient plc and the issuance of ordinary shares of Adient directly to holders of Johnson Controls ordinary shares on a pro rata basis.”

Johnson Controls reported 3Q16 net sales of $9.5 billion, a fall of 1.0% from the net sales of $9.6 billion in 3Q15. Sales from its Building Efficiency and Power Solutions segments rose by 33.0% and 3.1%, respectively. Sales from its Automotive Experience segment fell by 19.3% between 3Q15 and 3Q16. The company’s gross profit margin rose by 12.9% and its income from continuing operations before income taxes fell by 11.0%.

Its net income and EPS (earnings per share) rose to $383.0 million and $0.59, respectively, in 3Q16, compared with $178.0 million and $0.27 in 3Q15. JCI’s cash and cash equivalents fell by 21.8% and its inventories rose by 25.0% between 4Q15 and 3Q16. Its current ratio and long-term debt-to-equity ratio fell to 0.92x and 0.54x, respectively, in 3Q16, compared with 1.0x and 0.55x in 4Q15.

Johnson Controls has made the following projections:

• EPS of $3.95–$3.98 for fiscal 2016, which reflects a strong operational performance
• EPS of $1.17–$1.20 for fiscal 4Q16

This guidance doesn’t include the impact of the Tyco merger and transaction, integration and separation costs, year-end pension and post-retirement mark-to-market adjustments, or other nonrecurring items. Next, we’ll discuss Nike (NKE).