Johnson Controls Inc. (Symbol-JCI)

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Michael D
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Johnson Controls Inc. (Symbol-JCI)

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Stock Alerts

Johnson Controls Inc (JCI:NYSE) consensus earnings estimate for this year increased by 6.90% from $0.30 to $0.32.

Last Price: $15.02
What are the chances that this Dividend Achiever managed to sustain the dividend for the fiscal year of $0.52?

Great company, exposed to automobile components, but a leader in the electrical systems (moving forward a growth play). Plus infrastructure play, definitely a go.

But will the DIV stand?
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Re: Johnson Controls Inc. (Symbol-JCI)

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Prompted by http://www.financialwisdomforum.org/for ... 91#p404891 I'll lay out by basic thesis on this company and how I would value it. Looking back at the fundamentals over the past 10 years, revenue growth has averaged 7.3% (2001-2010) and EPS growth has averaged 4.5% over the same period. If you exclude the '09-10, then revenue growth is a fairly consistent 11.2% and EPS growth was 15.3%. Historically, P/E stayed in the 11-16 range, which I would consider a fair valuation for a company this size with the fundamental growth rates. My challenge is determining an expectation of future growth in revenue and EPS, particularly given the size of this company. The company provided guidance,
Johnson Controls press release wrote:Johnson Controls today affirmed the 2011 financial guidance it issued on October 12, 2010. Johnson Controls anticipates a sales increase of 9%, to approximately $37 billion. The 2011 expectations are the result of a global market recovery in its buildings business, modestly higher automotive production levels and growth across the businesses in emerging markets, as well as market share gains. Earnings are forecast to increase to approximately $2.30 - $2.45 per diluted share. Sales, earnings and margin improvements are expected in all three of its businesses in 2011.
Taking the mid-point in their EPS guidance, $2.38, indicates that at the current price of about $36, the stock is trading at a P/E around 15.2x, which is too far towards the high end of the historical range for me. I'd much rather purchase at the low end of the historic range, say a P/E of 11, which means about $26.20.

Taking the analysis further into the vague predictions world, in my ideal world, I target a 5 year compound annual return of 15%1. I'm modeling 2012-2015 EPS growth to slow towards mid-single digits, say 7%, which gives me an implied 2015 EPS of $3.11, which implies at 16x EPS a price of $49.81. To get my 15% total return, I need to buy at about $27.

I recognize that predictions are the weakest link in the investment process, but looking at the JCI numbers is a couple of different ways, the current price is too rich for the value I place on the company.

As this is an education forum, I welcome alternative viewpoints on my analysis and/or how to value this (or any other) company.

1 Given the current investment environment I recognize this is a large number that may not be achievable. The number what originally derived from the Canadian Shareowners Stock Study Guide methodology, which took it's work for the US based NAIC, now known as http://www.betterinvesting.org. Given the high expected rate of return required, I tend to be conservative in my future growth projections and also employ other valuation techniques to confirm valuation. So far in my investing career, this analysis method has stood me well, with the winners far outweighing the losers. YMMV, as may your valuation methods, thus we have a market.
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Re: Johnson Controls Inc. (Symbol-JCI)

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Thanks P_I. A comprehensive explanation. I do not do as much analysis as you do, but generally agree p/e has to be closer to bottom of trraditional range than top of range as one measure, along with EPS growth exceeding inflation.
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Re: Johnson Controls Inc. (Symbol-JCI)

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AltaRed wrote:Thanks P_I. A comprehensive explanation. I do not do as much analysis as you do, but generally agree p/e has to be closer to bottom of trraditional range than top of range as one measure, along with EPS growth exceeding inflation.
Most of my analysis is automated using either purchase tools and/or spreadsheets. The hard work is explaining it to someone else.
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Re: Johnson Controls Inc. (Symbol-JCI)

Post by Michael D »

Thank you for this. Recently, I noted that I wasn't sure if I should sell or buy more! I'll buy more with favourable P/E and confirmed dividend growth
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Re: Johnson Controls Inc. (Symbol-JCI)

Post by Lazy Ninja »

Appreciate the analysis Peculiar_Investor. JCI isn't on my watch list, or one that I've ever looked at, but your breakdown raised a few questions for me.
Looking back at the fundamentals over the past 10 years, revenue growth has averaged 7.3% (2001-2010) and EPS growth has averaged 4.5% over the same period. If you exclude the '09-10, then revenue growth is a fairly consistent 11.2% and EPS growth was 15.3%.
The type of analysis you've done here obviously works better the less cyclical a company's revenues/earnings are. The more consistent a company is, the more likely I am to be interested, but do you have any rules of thumb for deciding when to discard/ discount an unusually good or bad year (or two)? EPS growth of either 4.5% or 15.3% (or somewhere in between) would make a HUGE difference in determining a fair valuation. Was it the consistency you saw in the 2000-2008 period that led you to discount the 2009-10 portion?
Peculiar_Investor wrote:Historically, P/E stayed in the 11-16 range, which I would consider a fair valuation for a company this size with the fundamental growth rates.
Does PEG factor into your analysis then? If I believed that EPS growth of 15.3% was sustainable over the short-mid term, then a P/E of 11 to 16 seems like a bargain to me.
Peculiar_Investor wrote:I'm modeling 2012-2015 EPS growth to slow towards mid-single digits, say 7%, which gives me an implied 2015 EPS of $3.11, which implies at 16x EPS a price of $49.81. To get my 15% total return, I need to buy at about $27.
I understand using a slowing growth rate over time. For one thing, it would be extraordinarily difficult for a large company to keep cranking out 15% growth, so the reduction seems prudent. For another, extrapolated far enough into the future, one would be looking at some absurdly optimistic intrinsic value. In this case though, your 7% growth rate is closer to the (impaired?) 4.5% rate mentioned earlier than the 15.3%. Any particular reason? More importantly, why did you use the high end of the historical P/E ratio to arrive at $49.81, as opposed to say, the mid-point of 13.5, which would imply a price closer to $42? Or, to put it slightly differently, why assume both a slowing rate of EPS growth, and the high end of the historic multiple?

I realize this stuff is as much art as science, but would appreciate any elaboration that you'd be willing to offer.
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Re: Johnson Controls Inc. (Symbol-JCI)

Post by Peculiar_Investor »

Lazy Ninja wrote:Appreciate the analysis Peculiar_Investor. JCI isn't on my watch list, or one that I've ever looked at, but your breakdown raised a few questions for me.
And I'd forgotten to answer them. Sorry.
Lazy Ninja wrote:
Looking back at the fundamentals over the past 10 years, revenue growth has averaged 7.3% (2001-2010) and EPS growth has averaged 4.5% over the same period. If you exclude the '09-10, then revenue growth is a fairly consistent 11.2% and EPS growth was 15.3%.
The type of analysis you've done here obviously works better the less cyclical a company's revenues/earnings are. The more consistent a company is, the more likely I am to be interested, but do you have any rules of thumb for deciding when to discard/ discount an unusually good or bad year (or two)? EPS growth of either 4.5% or 15.3% (or somewhere in between) would make a HUGE difference in determining a fair valuation. Was it the consistency you saw in the 2000-2008 period that led you to discount the 2009-10 portion?
There's the rub in the investment process, making judgments. In general I'll look at the 10 year rates and then again the rates for the past 5 years, and as you note, look for consistent growth. In the ideal world, I've love to find consistent corporate performance (but not too consistent -- think Madoff :lol: )I invest in the real world, so I expect some bumps along the way and each case/company is different. As we all know the '09-'10 period was a difficult time for most companies, so I gave JCI's management the benefit of the doubt on those years.
Lazy Ninja wrote:
Peculiar_Investor wrote:Historically, P/E stayed in the 11-16 range, which I would consider a fair valuation for a company this size with the fundamental growth rates.
Does PEG factor into your analysis then? If I believed that EPS growth of 15.3% was sustainable over the short-mid term, then a P/E of 11 to 16 seems like a bargain to me.
Not directly, but it is likely evident behind the scenes in the model and calculations.
Lazy Ninja wrote:
Peculiar_Investor wrote:I'm modeling 2012-2015 EPS growth to slow towards mid-single digits, say 7%, which gives me an implied 2015 EPS of $3.11, which implies at 16x EPS a price of $49.81. To get my 15% total return, I need to buy at about $27.
I understand using a slowing growth rate over time. For one thing, it would be extraordinarily difficult for a large company to keep cranking out 15% growth, so the reduction seems prudent. For another, extrapolated far enough into the future, one would be looking at some absurdly optimistic intrinsic value. In this case though, your 7% growth rate is closer to the (impaired?) 4.5% rate mentioned earlier than the 15.3%. Any particular reason? More importantly, why did you use the high end of the historical P/E ratio to arrive at $49.81, as opposed to say, the mid-point of 13.5, which would imply a price closer to $42? Or, to put it slightly differently, why assume both a slowing rate of EPS growth, and the high end of the historic multiple?
As I mention upthread, my technique was "originally derived from the Canadian Shareowners Stock Study Guide methodology, which took it's work for the US based NAIC, now known as http://www.betterinvesting.org. These tools have been discussed before, see http://www.financialwisdomforum.org/for ... 42#p141342

In simplifying my explanation, I neglected to mention that the PE range values are actually the average high PE and average low PE over the past 5 years.

The model forecasts out 5 years to calculate a upside price, which is the upside EPS multiplied by the upside PE. Now I've got a view on the high end of where the price could be in 5 years time. The model also calculates a future low price, I just didn't cover it in my explanation. The model has other data points to review as well. Once again judgment enters the equation, as you point out, if growth is slowing, shouldn't an investor expect multiple compression to occur? But that is why I'm using the average high PE, not the absolute high PE.

BTW, if you (or anyone else) is interested, the folks at BetterInvesting.org are having an Open House.
BetterInvesting wrote:You can invite your friends, family, neighbors, colleagues, customers, acquaintances, at no obligation, to sample the wealth of resources provided by the BetterInvesting community --- as your guests and our guests, at http://www.betterinvesting.org/openhouse
Lazy Ninja wrote:I realize this stuff is as much art as science, but would appreciate any elaboration that you'd be willing to offer.
So true.

I'm a buy and hold investor who plans to hold for a minimum of 5 years, hopefully forever. Once I've completed a stock study and reviewed the companies business, management team and fundamentals, I'll usually play around with the assumptions a bit to gain an understanding of the sensitivity of my judgments. I use some Graham techniques as well in an attempt to ensure that I have some margin of safety in picking an entry/exit point.

Hope this both answers your questions and gives you some valuation ideas to further consider.

Edit: Added link to yielder post in the Archives.
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Re: Johnson Controls Inc. (Symbol-JCI)

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Peculiar_Investor wrote:And I'd forgotten to answer them. Sorry.
No apology necessary. Your PM implied you were going to get back to it, but wisely didn't include any sort of time frame for doing so :wink:

I've never visited the better investing website so will definitely have to check it out.
Peculiar_Investor wrote:Hope this both answers your questions and gives you some valuation ideas to further consider.
Yes, I really appreciate the clarification. Your initial explanation of how you arrived at a valuation interested me considerably, but raised as many new questions for me as it offered answers. I've toyed with many methods of establishing fair value, but never felt very confident about using any particular one. As such, I'm always intrigued to read about the approach of someone who does believe in the system they use. Thanks again.
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Re: Johnson Controls Inc. (Symbol-JCI)

Post by Peculiar_Investor »

I haven't followed Johnson Control very much over the past few years. A friend has shares and had a question about the tax treatment of the Johnson Controls and Tyco merger (About the Merger | Johnson Controls) which was finalized on September 6, 2016.
Johnson Controls, a global multi-industrial company, and Tyco, a global fire and security provider, have combined to create Johnson Controls International plc, a global leader in building products and technology, integrated solutions and energy storage.

This merger brings together best-in-class product, technology and service capabilities across controls, fire, security, HVAC, power solutions and energy storage, to serve various end markets including large institutions, commercial buildings, retail, industrial, small business and residential.
Part of the merger seems to be a tax inversion by relocated HQ to Britain. Subsequently they've spun-off another company, Adient, on October 31, 2016 (see Press Releases | Johnson Controls Inc. for more details).

Many US companies that have significant operations in Canada get advance rulings from CRA on the tax treatment of these events and often the details can be found on CRA's Eligible spin-offs page and/or the companies Investors relations page, but we cannot find anything specific to Canadian shareholders and the tax treatment(s) involved.

Are there any shareholders here on FWF that have uncovered any documentation on the tax treatment of this merger/spin-off? If so, could you please post the details and any links. Thanks in advance.
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Re: Johnson Controls Inc. (Symbol-JCI)

Post by Birdie barrage »

I have a similar situration to the post on Nov 11, 2016 regarding the merger of Johnson Controls and Tyco and the subsequent spin out of Adient. I have not seen any responses from the Nov 11 post so I thought I would jump in and see if anyone has any information in the past 2/3 months. Bottom line I am looking for direction on the valutaion for Canadian tax from the Johnson Controls Tyco merger and spin out of Adient.
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Re: Johnson Controls Inc. (Symbol-JCI)

Post by Peculiar_Investor »

Not sure if it helps, but http://www.costbasistools.com/spinoff/calculator.php (found via the BH forum) lists Adient as an input for "Name of stock received in spinoff". At least it could help figure out the various cost basis' involved.
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