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This blog is entering its fourth year (!) and I am starting to see some recurring names among the stocks making the lists.  Johnson Controls made the list of top % gainers today, closing at $81.00, up $3.75 or 4.85% on the day.  I do not own any shares of JCI, but a couple of my kids have a few shares (a lot less than even 100 shares total).

I first posted Johnson Controls on Stock Picks Bob's Advice on July 9, 2004, when the stock was trading at $53.24.  With today's close at $81, this represents a gain of $27.76 or 52.1% since the original post.

Almost exactly one year ago, on October 12, 2005, I "revisited" Johnson Controls (JCI) on Stock Picks when the stock was trading at $63.60.  With today's close at $81.00, this still represents a gain of $17.40 or 27.4% since posting this stock a year ago on this blog.

Let's take another look at this company and see if it still deserves a spot on this blog!

1. What exactly does this company do? 

Taking a look at the Yahoo "Profile" on Johnson Controls, we find that the company:

"... provides installed building control systems and technical and facility management services for the nonresidential buildings market worldwide. It operates through three segments: Building Efficiency, Interior Experience, and Power Solutions."

2.  Was there any news today to explain the stock price move?

Scanning through the Yahoo "Headlines" on JCI, I found a report on an upgrade by Robert W. Baird from 'neutral' to 'outperform'.  Also reported, was the story about Johnson Controls "Annual Analyst Meeting". Although the reports from the company sounds mixed to me--fourth quarter guidance was raised to $1.86 to $1.91/share, ahead of analysts' estimates of $1.84/share, but fiscal-year 2006 profit would come in at $5.10 to $5.15/share, slightly below analysts' expectations of $5.21/share.  Also, first quarter 2007 results were guided to $.80 to $.85/share, below analyst predictions of $.95/share.  However, fiscal 2007 was estimated at $6.00, ahead of the $5.99 expected.  

Somehow, although I did NOT attend this meeting, it appears that the stock price has been held back due to the large portion of its business tied to the slowing American auto industry.  However, the company is apparently doing better than expected in the battery business and building environmental control business.  As Morgan Stanley analyst Jonathan Steinmetz, who reiterated his "overweight rating" stated:

"Today's analyst day showed that our thesis for upgrading the stock still holds but that at the margin, building efficiency and power solutions are doing better than we had originally anticipated, and the auto interior business is doing worse."

3. How did they do in the latest reported quarter? 

On July 20, 2006, Johnson Controls announced 3rd quarter 2006 results.   Sales for the 3 months ended June 30, 2006, came in at $8.4 billion, up 19% from the $7.1 billion reported in the same quarter the prior year.  Net income came in at $338 milion, up from $255 million in the same quarter last year.  Diluted earnings per share worked out to $1.70/share this year, up from $1.31/share the prior year.  Insofar as expectations on this report, it was reported that analysts from Thomson First Call had been looking for earnings of $1.68 (the company beat this), on sales of $8.43 billion (the company came in a bit light from expectations.)

4. What about longer-term financial results? 

The "5-Yr Restated" financials on Johnson Controls (JCI), as reported by Morningstar.com,  is really a very pretty picture. imho. First of all, looking at the revenue, the ever-increasing row of purple bars demonstrates the vigorous revenue growth from $17.4 billion in 2001 to $27.5 billion in 2005 and $31 billion in the trailing twelve months (TTM).  It is the consistency of results that defines quality for me! And Johnson Controls shows consistency!

Examining the earnings, we can see the same steady increase from $2.55/share in 2001 to $4.68/share in 2005 and $4.86/share in the TTM.

The company also pays a dividend which is a plus.  And the big plus is the steady increase in the dividend from $.62/share in 2001 to $1.00/share in 2005 and $1.09/share in the TTM.

Free cash flow has been strong, if a bit variable, over the last several years with $205 million reported in 2003, increasing to $520 million in 2004, dropping to $263 million in 2005 and back to $572 million in the TTM.

Of all of the data, the balance sheet is the least impressive on this page, imho.  Not because the company is insolvent, but simply because the combined cash and other current assets adds up to $9.34 billion, which when compared to the $8.68 billion in current liabilities, gives us a current ratio for Johnson Controls of only 1.08.  It has not been uncommon on this blog to see companies with ratios at 2 or higher, a common value for a "healthy" balance sheet.  But with the solid free cash flow, and growing revenue and earnings, I am not very concerned about the financial health of the company.  However, I cannot gloss over these things that I fine, even if they are counter to my over-all impression of the stock! 

5. What about some valuation numbers on this stock? 

Taking a look at Yahoo "Key Statistics" on JCI, we find that this company is a large cap stock with a market capitalization of $15.84 billion.  The trailing p/e is a very reasonable (imho) 16.68, with a forward p/e (fye 30-Sep-07) estimated at 13.52.  Thus, the PEG suggest a reasonable valuation with a value of 1.12.

Evaluating the valuation from the Price/Sales perspective, and using the Fidelity.com eresearch website, we find that in the industrial group of "Auto Parts", Johnson Controls is very reasonably valued with a Price/Sales ratio of 0.1. Topping this group is BorgWarner (BWA) at 0.3, Magna International (MGA) at 0.3, American Axle (AXL) at 0.2, and both Johnson Controls and Lear (LEA) tied at the bottom of the group with a ratio of 0.1.

Checking profitability, from the perspective of the Return on Equity ratio (ROE),  we find that Johnson Controls leads the group, tied with BorgWarner at 15%, followedby Magna Intl at 9.6%, American Axle at 5.3% and Lear with a negative (103.8)% ROE.

Thus, while the price/sales ratio is excellent for valuation, the profitability also leads its particular group of stocks.

Finishing up with Yahoo, we find that the company has 195.57 million shares outstanding with 194.63 million that float.  Of these, 2.24 million (down from 2.68 million the prior month) as of 9/12/06 were out short representing just 1.20% of the float or 2.3 trading days of volume (under my cut-off of significance of 3 days for the 'short ratio').

As noted, the company does pay a dividend with an anticipated payment of $1.12 yielding 1.50%.  The company last split its stock with a 2:1 stock split on January 5, 2004.

6. What does the chart look like? 

Taking a look at the "Point & Figure" Chart on JCI from StockCharts.com, we can see that the stock has made an extremely strong move from March, 2003, when the stock bottomed out at $35, until it hits its recent high at $89 in June, 2006.  The stock has pulled back from that high after the last quarter was a bit of a mixed-bag, hitting a low of $67 in September, 2006.  Recently, the stock has been quite strong, with analysts' upgrades and the like, breaking through resistance at $75 to its current level at $81.  If I had my druthers, I would like to see this stock stay above $76 on its testing to the downside and once again move higher.  Overall the graph is encouraging to me without being over-extended.

7. Summary: What do I think about this stock?

Let's review some of the things I discussed on this entry and compare the plusses and minuses on this company.  First of all, this stock has been a tremendous performer for me on this blog....demonstrating the power of consistent revenue and earnings growth on price performance imho.  The company moved higher after an analysts' meeting with the company.  I believed that JCI convinced analysts that even though the auto market remains soft, that this company has enough other businesses to continue with dynamic growth...even IF the next quarter IS going to be a tad weak.  The last quarter's result was strong although expectations were not completely exceeded.  And the Morningstar.com report is beautiful with steady revenue growth, earnings growth, dividend growth, and free cash flow.  The balance sheet is a bit average...with a current ratio just a little over 1.0.  Would like to see the company with a bit more cash.

Insofar as valuation, the p/e is reasonable, the PEG is just over 1.1, the Price/Sales is the lowest in its group, and the Return on Equity is the highest.  These are all great numbers.

There aren't many shares out short, the company pays a small dividend and has split its stock almost three years ago.

All-in-all I do like this stock.  I especially like that strong and stead revenue, earnings, and dividend growth.  I also appreciate the potential of the auto battery business as the company is a key player in the hybrid battery business.  In a morbid note, with all of the school security problems recently, the company may well be a big player in security upgrades in classrooms across the country.  My analysis does not depend on this unfortunate development.

Thanks again for stopping by and visiting!  Each one of you who stops by and visits is welcome to stay and browse.  I hope that my writing is helpful to you.  If you have any comments or questions, I very much look forward to all of your emails.  You can reach me at bobsadviceforstocks@lycos.com.  I shall try to answer as many as I can and shall include the interesting ones in my blog.  Also be sure and visit my Stock Picks Podcast where I discuss many of the same stocks I write about right here!

Bob