Jefferies Comments On Johnson Controls Following Recent Earnings Report

Johnson Controls JCI reported in-line F2Q EPS of $0.56 and guided to a F3Q range of $0.51 to $0.53, 10.3% below consensus of $0.58 at the midpoint. JCI quantified the Japan-hit as a $500 million revenue headwind, costing $0.16-$0.18 per share in F3Q. JCI expects F4Q to normalize and for revenue lost in F3Q to be made up in the first half of F2012. However, the company cautioned that visibility with non-Japanese OEMs was somewhat low and that the situation remained fluid. The HVAC business is clearly beginning an up-cycle. But while JCI increased its annual revenue guidance for this segment by about 600bp, its margin guidance was unchanged. The F2Q operating margin of 3.8% was up just 30bp from the prior year, implying a low-end incremental margin of 5.2%. JCI cited increases in SG&A related to future expected growth, copper prices, and negative mix from Global Workplace Solutions growth as headwinds that are expected to persist through the year. Jefferies sense is that JCI's operating leverage in BE will likely be the determining investment controversy, near term. Jefferies has a $43 PT and Hold rating on JCI JCI is trading higher at $40.02