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Deutsche Bank Upgrades Johnson Controls (JCI) To 'Buy' On Valuation, Cuts PT To $39

 April 13, 2012 07:33 PM

Deutsche Bank analyst Rod Lache upgraded his rating on shares of Johnson Controls Inc. (NYSE:JCI) to "Buy" from "Hold" based on valuation, while lowering its price target to $39 from $40.

The catalyst for Lache's more favorable stance on the stock is two-fold: he believes that investors have become overly bearish regarding JCI's near term and long term prospects, and he believes there's a very strong probability that JCI will begin showing improved performance over the relatively near term.

The analyst believes that increased confidence in the prospects for double digit earnings growth should serve as a catalyst for multiple expansion. Automotive Experience margins have disappointed, as the company suffered longer term consequences from decisions made during the 2008-2009 downturn.

[Related -AeroVironment, Inc. (AVAV): Calls In Play As Shares Take Off]

Building Efficiency margins disappointed as a result of costs associated with rapid growth in GWS, as well as over-hiring in anticipation of growth which did not fully materialize. Power Solutions has suffered through a difficult (warm) winter, and a plant closure in China.

Lache believes that JCI is now through the most difficult phase of its Automotive Experience pipeline. Building Efficiency is undergoing a restructuring that should provide near term positives, and the GWS business should show incremental improvement over the next few quarters.

Power Solutions expectations have been properly re-set (the analyst doesn't expect a guidance revision), and he believes that there's potential for significantly improved results over the next few quarters.

[Related -Johnson Controls Inc (JCI): Fundamental Stock Research Analysis]

Lache believes it is important to note that JCI has an impressive longer term track record, with year-over-year revenue growth in 64 of the past 65 years and earnings growth in 20 of the past 21 years.

And despite the recent disappointments, even the company's recent performance has been respectable. JCI achieved a dramatic earnings recovery in 2010, net income rose by a further 22% in 2011 (a new record), and the analyst still expects earnings to rise by 13% in 2012 despite the aforementioned challenges.

Moreover, if Lache's estimates prove correct, JCI should return to high teens % earnings growth in 2013. Even if the multiple expansion (that we anticipate) does not occur, he believes that JCI's shares offer compelling returns as they track JCI's double digit earnings growth.

JCI closed Friday's regular trading up 2.32% at $32.57.



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