Johnson Controls and Tyco Merge, What You Need to Know

Monday's announcement of a merger agreement between Tyco International (NYSE:TYC) and Johnson Controls Inc (NYSE:JCI) brings different things to each set of investors. Adding Tyco's fire and security systems to Johnson Controls' heating, ventilation, and air conditioning, or HVAC, solutions will create a leading player in the commercial building-products marketplace. However, Johnson Controls also contains a Power Solutions and Automotive Experience business (car batteries, and car seating and interiors, respectively) that Tyco investors will now be invested in. Let's take a closer look at the deal and what it means to both sets of investors.
Two stages You can think of the process in two stages. First, Tyco and Johnson Controls will merge, with Tyco investors owning around 44% of the combined entity, to be called Johnson Controls plc, with current Johnson Controls investors owning the remaining 56%.

READ THE FULL EQUITY RESEARCH ARTICLE LINKED

5 Key Indicators for the Industrial Sector

While we don't believe in macroeconomic speculation at the Motley Fool, we admit that sometimes key insights into a company's prospects can be explained by looking closely at an industry or macro economic indicator. After all, it's hard for even the best company to fight against strong economic tides. With that in mind, the information in the following 5 charts give a rough idea of how the underlying industries of the 5 companies in question might fare in the year ahead.

READ THE FULL EQUITY RESEARCH ARTICLE LINKED

Time to Buy Johnson Controls for 2016?

Johnson Controls' (NYSE:JCI) recent strategic review and outlook failed to convince the market, with the stock down around 7% in the two days' trading afterward. The negative issues look stock-specific rather than any kind of warning on its end market, and rivals such as United Technologies (NYSE:UTX) and Ingersoll-Rand Plc (NYSE:IR) shouldn't be unduly worried by what Johnson Controls' management said. However, a deeper dive into the company's guidance suggests management may be taking a rosy view on its prospects in China in 2016. Let's take a closer look.

READ THE FULL EQUITY RESEARCH ARTICLE LINKED

Johnson Controls Management Speaks

Automotive parts and building components maker Johnson Controls Inc  has been in transformation mode for the past couple of years, and its fiscal 2016 promises more of the same. The company is best known as a major automotive interior manufacturer, but CEO Alex Molinaroli has increasingly focused on its building efficiency segment while investing in expanding power solutions (automotive batteries). Meanwhile the automotive experience segment is set to be spun off next year. With this in mind, let's take a look at five things management wants you to know about Johnson's future plans.


READ THE FULL EQUITY RESEARCH ARTICLE LINKED

Johnson Controls Conference Call Takeaways

Investors in Johnson Controls Inc. (NYSE:JCI) have watched the company being restructured in the past couple of years, and the recent third-quarter results promised more of the same. Having announced an intent to explore strategic options for its Automotive Experience segment (dealing in car seating and interiors) in June, management subsequently released third-quarter results and announced plans for a tax-free spinoff of the segment -- one that could change the nature of the company. With this development in mind, let's look at the five key takeaways from the earnings report.


READ THE FULL EQUITY RESEARCH ARTICLE LINKED

Johnson Controls Earnings Call

Johnson Controls (NYSE: JCI  ) delivered an impressive set of first-quarter results last week, and investors must be feeling pretty good about the company's prospects in 2015. Indeed, Wall Street consensus for EPS growth is 13.2% in 2015, followed by 14.1% in 2016, even while revenue is expected to decline slightly in the period. In a nutshell, the investment case for Johnson Controls is based on its ability to restructure the company and generate margin expansion. In this context, let's look at five key takeaways from the recent earnings call, and see how management intends to generate growth. Is there more upside to come?


READ THE FULL EQUITY RESEARCH ARTICLE LINKED

Johnson Controls (JCI) Earnings Analysis

Johnson Controls (NYSE: JCI  ) pleased the market by reporting first-quarter results Thursday that beat analyst estimates. Furthermore, management reaffirmed the full-year guidance given at its investor day presentation in December. The company remains in transformational mode, and its earnings confirm many of its underlying positive trends. Let's take a look at them.


READ THE FULL EQUITY RESEARCH ARTICLE LINKED

Is Johnson Controls a Buy?

Johnson Controls  (NYSE: JCI  ) investors must be disappointed this year as they have watched their stock underperform the S&P 500 by nearly 14% to date in 2014, at the time of this writing. However, the poor stock price performance largely has resulted from end-market conditions rather than anything the company has done. On the contrary, the multi-industrial company's management has made a host of exciting initiatives that could propel earnings higher in the future. With these initiatives in place, and some of its end markets starting to look better, is now the time to buy into Johnson Controls?


READ THE FULL EQUITY RESEARCH ARTICLE LINKED

The Bearish Case for Johnson Controls Inc Stock (JCI)

Johnson Controls  (NYSE: JCI  ) investors will be buoyed by the stock's recent strong run, but can it continue? Management has ample reason to believe it can improve revenue and margin growth across its segments in 2015. I've already examined the bullish case for the stock in a previous article; now it's time to look at the bearish case.

3 bearish factors for Johnson Controls

Before going into detail, I should note that I'm positive on management's restructuring efforts and internal execution. However, the company's valuation and the potential for deterioration in China's economy -- and ultimately car sales -- suggest there may be better ways to play the other positive end-market trends the company is seeing. (More on that in a future article.)


The company's segmental income in fiscal 2014 was a roughly three-way split among the building efficiency (heating, ventilation, and air conditioning), power solutions (car batteries), and automotive experience (car seating and interiors) businesses. Two of the three risks the company faces relate specifically to the auto experience segment.


READ THE FULL EQUITY RESEARCH ARTICLE LINKED

The Bullish Case for Johnson Controls (JCI) Stock

Johnson Controls (NYSE: JCI  ) investors have watched their stock put in a strong recovery in the last month, and the share price is only down a few percentage points on the year, as I write. About a month ago, Fools looked at just why the stock had slumped in 2014, and more recently at the five things management hopes will improve company performance. Now, it's time to look at things from another perspective and ask: What are the three things that could take the stock higher?


READ THE FULL EQUITY RESEARCH ARTICLE LINKED

Johnson Controls Earnings Call

The market liked Johnson Controls' (NYSE: JCI  ) fourth-quarter results and marked the stock up more than 3% when earnings were released on Oct. 30. The stock certainly needed the boost, because up to that point it was down nearly 13% on the year. Johnson Controls investors will be looking for the earnings to spark a recovery in the stock price. Here are the five things that management hopes will take the stock higher.

Building efficiency segment set to improve

Johnson Controls is trying to expand its building efficiency segment sales in an attempt to reduce its reliance on the automobile sector -- an industry known for its cyclicality. The building efficiency segment sells heating, ventilation, and air conditioning, or HVAC, solutions. Unfortunately, this year has proven to be tougher than management expected, but the good news is that the segment's fortunes look set to improve.



On the recent conference call, CEO Alex Molinaroli first highlighted the improvement in the institutional component (the company's core HVAC market) of the Architecture Billings Index -- a key industry measure of construction growth. A reading above 50 indicates expansion.


READ THE FULL EQUITY RESEARCH ARTICLE LINKED

Johnson Controls Earnings Analysis

It's been a difficult year for Johnson Controls (NYSE: JCI  ) investors, as they have watched their stock underperform the market. The market was looking for some signs of improvement in its fourth-quarter results. In the end, the company delivered a solid quarter with the headline numbers pretty much in line with expectations.

It's time to look at what happened in the fourth quarter, and to look for any indications of where the company is headed next.

Source: Johnson Controls.

Johnson Controls fourth-quarter results

A quick look at the headline numbers:

• Fourth-quarter revenue of $11 billion versus analyst estimates of $11.2 billion
  
• Fourth-quarter adjusted diluted EPS of $1.04 versus analyst estimates of $1.01 and internal guidance of $1-$1.02
  
• First-quarter 2015 EPS guidance of $0.74-$0.77 versus analyst estimates of $0.77
  

Fourth-quarter EPS is ahead of estimates, but the guidance for the first quarter is a little light compared to analyst estimates. In short, it was a mixed set of earnings, with sales up 3% and gross profit up 2%.


READ THE FULL EQUITY RESEARCH ARTICLE LINKED

Why Has Johnson Controls Slumped This Year?

Investors in Johnson Controls  have watched their stock decline by nearly 14% this year, even as the company has outperformed expectations in one of its three segments (automotive experience) and made a host of initiatives to improve productivity. With that said, you might be wondering just why the company has declined in 2014. Let's take a look.

Source: Johnson Controls

Great Expectations
No, not a treatise on Charles Dickens, but a lead-in to what has happened this year with the company. Simply put, at the start of the year, investors had expected positive things from its three segments:

• Power solutions (automotive batteries) was expected to have a strong winter thanks to severe cold weather in North America.
• The building efficiency (heating, ventilation, and air-conditioning, or HVAC) segment was expected to see a pickup in demand from a long-anticipated improvement in North American construction activity.
• Automotive experience (car seating and interiors) looked set to have a good year as North America and China automotive sales and production looked likely to remain in growth mode.

Fast-forward to what actually happened, and it's a mixed story.


READ THE FULL EQUITY RESEARCH ARTICLE LINKED HERE

Johnson Controls: a Stock to Buy?

t's easy to dismiss Johnson Controls (NYSE: JCI  ) as just another play on global growth, but there is a lot more to investing in the company than you might first think. Its mix of automotive and construction end markets looks favorably set for growth, and the company is taking action to restructure two of its three segments. With that said, is Johnson Controls a buy?

Source: Johnson Controls.

Restructuring the automotive experience and building efficiency segments

Before reading more about Johnson Controls, you might want to check out a review of the key takeaways from the company's last earnings report, as well as a rundown of the bullish and bearish cases for the stock.


READ THE FULL EQUITY RESEARCH ARTICLE LINKED

Why Johnson Controls Could Fall-Equity Analysis and Research

It always make sense to take a balanced viewpoint in investing, and while there are plenty of positive things happening at Johnson Controls Inc. (NYSE: JCI  ) , there are also some negatives. The three things that investors need to worry about are its reliance on certain customer programs, the effects of weather, and the possibility of an unfavorable long-term trend with car usage. It's time to look a little closer at the bearish case for the stock.


Auto experience customers may disappointBefore getting into the nitty-gritty, readers should note that this article is part of a series. The things that management wants you to know are outlined here, and the bullish case for Johnson Controls is here.


Focusing on the bearish case, investors should start by appreciating that the automotive experience segment, consisting of automotive seating and interiors, has outperformed most expectations this year. Going into the year, management had talked about 1%-2% revenue growth for the full year, but with 9% growth for the first nine months, it's likely to come in far in excess of expectations. Essentially, its customers' car sales have outperformed the marketplace, particularly in Europe. Indeed, CFO Bruce McDonald noted on the latest conference call that "we are able to exceed the market production levels in all three of the main regions."


READ THE FULL EARNINGS ARTICLE LINKED HERE

Why Johnson Controls Could Rise

Despite having declined nearly 9% year to date as of this writing, Johnson Controls' (NYSE: JCI  ) stock price has the potential to do much better for the rest of 2014. The three reasons I'll highlight include a specific end-market improvement, company restructuring, and exposure to an overall pickup in the economy. Altogether, it makes a powerful case for why Johnson Controls can rise from here.

Building-efficiency improvement

As I discussed in my previous article, which outlines management's latest quarterly conference call, Johnson Controls is investing in acquisitions in order to expand its exposure to the heating, ventilation, and air conditioning, or HVAC, market via its building-efficiency segment. The company's other two segments are focused on the automotive industry. As such, building efficiency generated 29% of segmental income in the first nine months. However, investors can expect it to contribute more in the future following the $1.6 billion acquisition of HVAC-focused Air Distribution Technology, or ADT, and the announcement of a joint venture with Hitachi.


READ THE FULL ARTICLE LINKED HERE

Johnson Controls Conference Call Review

It's been a confusing year for investors in Johnson Controls  (NYSE: JCI  ) . The company is best known for its automotive products (mainly batteries and car interiors), and the automotive industry has been an outperformer recently within the industrial sector. In turn, the company has outperformed its peers, and its own expectations, with its automotive experience (car interiors and seating) segment. However, the stock is down nearly 7.5% year to date. Clearly, management needed to explain a few things during its third-quarter conference call, and here is what they said.

Cautiously optimistic on building efficiency

Before diving into the conference call, let's take a look at this chart, which depicts Johnson Controls' three segments by income for the first three quarters of its fiscal year.

Source: Johnson Controls company presentations.

Automotive experience (seats and interiors) and power solutions (automotive batteries, of which roughly three-quarters go to the aftermarket) make up the bulk of profit, but the company is investing in its building efficiency (heating, ventilation, and air conditioning, or HVAC) segment in order to diversify its income stream. More on that later.


READ THE FULL ARTICLE LINKED HERE

Johnson Controls Upside Potential

The irony behind the latest Johnson Controls'  results is that they confirm the outperformance of its automotive activities, at a time when the company is investing on the construction side. Moreover, rivals like Ingersoll-Rand  and United Technologies  also recently reported some moderate results in their heating, ventilation, and air conditioning, or HVAC, segments. With that said, does Johnson Controls' have some upside potential in the second half?



How Johnson Controls can outperform
The company reports out of three segments, of which readers can see the first nine months segmental income here.

Source: Johnson Controls Presentations

The good news is each segment has upside potential for the rest of 2014:


READ THE FULL ARTICLE LINKED HERE

Aloca Earnings Analysis

Alcoa's  earnings are always interesting because the company gives great guidance on the industrial economy. In addition, the earnings come at the start of the new earnings seasons, and they give Fools the chance to confirm whether Alcoa's commentary matches what their companies have been saying recently. In this regard, shareholders in Cummins, Johnson Controls, and Caterpillar  should follow closely, Alcoa's management had a lot of interesting things to say.



Alcoa upgrades market forecasts, good for Cummins
A summation of Alcoa's end market guidance reveals that the only formal upgrade to its outlook was in the heavy truck and trailer market. The parts in green are where upgrades took place.

Source: Alcoa presentations

READ THE FULL ARTICLE LINKED HERE

U.S. Car Companies Set to Win Big in China?

Faced with slowing economic growth, China's authorities have come up with the time-honored (dishonored?) solution of facilitating the creation of more debt. In the most recent case, China has opened up the asset-backed securities, or ABS, market to foreign car companies in an attempt to stimulate growth in the sector. In the near to midterm this looks like good news for a car company like Ford Motor Company , and also for car parts suppliers like Johnson Controls  or Visteon  .



What happened in China?
The move by the China Banking Regulatory Commission to allow foreign car companies to issue ABS is going to enable companies like the finance arms of Ford, Volkswagen, BMW and Toyota, among others, to start to challenge local banks in the issuance credit. ABS products are bundles of loans (in this case car loans) that are packaged and then sold on to other investors. Issuing ABS helps car finance companies because they are able to transfer risk and issue more loans to car purchasers.


READ THE FULL ARTICLE LINKED HERE