(By Balachander) Atleast two brokerages have downgraded their rating on shares of Johnson Controls Inc. (NYSE:JCI) after the maker of automotive batteries posted weak quarterly results and the company reduced its earnings forecast.
The company currently expects earnings growth for the fourth quarter to be 0 to 5 percent, sharply below prior guidance of a double-digit growth, blaming continued softness in its global markets and expectations for a lower Euro.
"We still like the medium-term story, but it could take longer to develop, so we are moving to the sidelines for the time being," wrote RBC Capital Markets analyst Joseph Spak. Spak lowered his rating on JCI to "Sector Perform" from "Outperform" and reduced price target on the stock to $30 from $37.
Spak is of the view that visibility beyond next quarter is limited and the company lacks an immediate positive catalyst.
"We do see a number of issues that should reverse out next year and provide a tailwind, but given a more cautious outlook on the macro and end-market demand, FY13 earnings growth could disappoint," Spak wrote. "If the macro deteriorates further, we believe it is unlikely JCI will be able to cost save its way to earnings prosperity."
Deutsche Bank analyst Rod Lache lowered his recommendation to "Hold" from "Buy" based on lowered confidence in JCI's earnings outlook, despite a very compelling valuation.
"Although we are hopeful JCI can break even in FQ4, we have considerable uncertainty even around this new projection following our meetings with Automakers and other industry contacts in Europe this week," Lache said.
In general, automakers appear to be bracing for significantly weaker European production in 2H12 vs. 1H12. Lache said there appears to be growing potential for industry dislocation/nationalization/consolidation. There is evidence the additional distress in this market will initially result in additional pricing/margin/volume pressure on suppliers.
Lache, who reduced price target on the stock to $32 from $35, believes that each JCI's divisions were on the verge of significant (company specific) operational improvement. "Looking at JCI's FQ3, it appears that our view was correct in 8 of the company's 9 publicly reported units; but 8 isn't enough, Lache wrote.
For fiscal 2013, Spak cut EPS estimate to $2.75 from $3.15 and Lache adjusted the estimate to $2.90 from $3.15.
On Friday, shares of the Milwaukee, Wisconsin-based company retreated 2.72 percent to trade at $25.36. Over the past year, the stock has been trading between $24.29 and $40.39.