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
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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
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.
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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.