Johnson Controls (NYSE:JCI) is forecasting 20% earnings growth in fiscal 2012, and plans to invest $1.2 billion in various growth projects during the year. The company is focusing much of its investment toward the emerging economies.
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Johnson Controls has announced a $1.7 billion capital budget for fiscal 2012, which started on October 1, 2011. The company expects to use 71% of these funds, or $1.2 billion, on a number of growth projects in fiscal 2012.
Johnson Controls will invest in additional battery manufacturing capacity in fiscal 2012 across its basic and advanced product line. The company is also investing to expand and grow business in the emerging economies, with a focus on China in particular. (For related reading, see Cyclical Versus Non-Cyclical Stocks.)
Fiscal 2012 Guidance
Johnson Controls established revenue and earnings guidance for fiscal 2012 and appears to be expecting a strong year. The company is looking for sales to grow 9% to $44.2 billion, and diluted earnings per share to be in a range from $2.85 to $3.00 per share. This would represent 20% growth over fiscal 2011, using the midpoint of the range.
This guidance is sensitive to overall trends in the economy, and Johnson Controls is assuming that non-residential construction spending in the U.S and Europe will grow 1.5 and 1.8%, respectively. The company is looking for much better growth in the emerging economies and is using a growth range here from 6.5 to 7.5%.
Another assumption supporting this guidance is the level of worldwide automobile production expected in fiscal 2012. Johnson Controls has incorporated year over year growth of 9.6% in North America, and 8% in China. Europe is expected to grow at a slower rate of 1.5% for the year.
Johnson Controls largest business segment is Automotive Experience, which manufactures interior products and systems for passenger cars and light trucks. The company estimates that revenues here will grow by 6% in fiscal 2012.
This segment reported $20 billion in sales in fiscal 2011, with about 50% of sales in Europe, and 80% of sales generated from seating systems and components.
Lear Corp (NYSE:LEA) is a major competitor in the seating product category, with 60% of its $2.4 billion backlog of business in the Seating category as of August 2011.
Another significant business segment for Johnson Controls is Building Efficiency, which sells HVAC equipment, control systems and services targeted towards the commercial market.
Johnson Controls competes with some large competitors in this business, including United Technologies (NYSE:UTX), which sells similar equipment through its Carrier segment. United Technologies reported sales of $9.2 billion in the nine months ending October 9, 2011.
Lennox International (NYSE:LII) also competes with Johnson Controls in the HVAC market but has approximately 42% of its revenues from the Residential Market in the most recent quarter.
Building Efficiency is a global business with $15 billion in revenues in 2011, with approximately 50% of these revenues generated in North America. Europe and Asia also provide a significant source of revenue for Johnson controls, with 2011 sales of $4.2 billion and $2.2 billion, respectively.
Johnson Controls expects fiscal 2012 revenues in the Building Efficiencies segment to grow from 9 to 11% over last year.
Johnson Controls is expecting the bulk of future growth in this business from the emerging economies, and estimates that 80% of all new commercial construction over the next decade will come from these markets.
Johnson Controls also believes that the Building Efficiency business will benefit from recent governmental mandates to increase energy efficiency. These laws tend to favor new construction or replacement of existing units.
The Bottom Line
Johnson Controls is investing billions towards increasing the company's footprint and business in China and other emerging economies. Although this strategy is sound and appropriate given the circumstances, it is scary just how much of corporate earnings growth in the U.S. is dependent on this small foundation. (For more on emerging markets, see The Risks Of Investing In Emerging Markets.)
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