This Company Could Become One of Buffett's Favorites (Part 4)
Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In previous articles, I have talked about several businesses that are considered “Buffett-Like Investments”, including Mosaic, Coca-Cola Enterprises, Sysco and Archer Daniels Midland. Those businesses are in the list of 28 stocks that possess similar characteristics of companies that Buffett has bought in the past, according to Thomson Reuters' senior analyst John Kozey. In this article, I will analyze Johnson Controls (NYSE: JCI), a consumer cyclical stock from that list, to see whether or not investors should buy the company at its current trading price.
A big player in HVAC and automotive batteries
Johnson Controls, incorporated in 1885, is considered to be one of the world’s largest diversified technology and industrial company, serving customers in more than 150 countries. It has three main business segments: Building Efficiency, Automotive Experience, and Power Solutions. The Building Efficiency segment sells HVAC products and installs control systems for construction and retrofit markets. The Automotive Experience segment is to make interior products and systems for vehicles, including passenger cars and light trucks, while the Power Solutions segment is to make lead-acid automotive batteries in around 60 manufacturing and assembly plants.
The majority of its sales, $21.33 billion or nearly 51% of total sales, were generated from the Automotive Experience segment. The Building Efficiency segment ranked second, with $14.7 billion in 2012 sales, while the Power Solutions segment generated only $5.9 billion in sales. Among the three segments, the Power Solutions segment enjoyed the highest margin of 14.5%, while the margins of the Building Efficiency and the Automotive Experience were only 6.18% and 3.76%, respectively.
A cash cow with a great historical dividend payment record
In the past 10 years, Johnson Controls has managed to consistently generate positive operating cash flow, fluctuating in the range of $769 million to $1.93 billion. The free cash flow has been negative in two out of ten years due to large capital expenditures. In the past twelve months, the company generated more than $1.95 billion in operating cash flow and $290 million in free cash flow.
Johnson Controls seems to fit in the income portfolio, thanks to its great historical record of increasing dividends. What impresses me is that Johnson Controls have been paying uninterrupted dividends since 1887, a record of 126 years. In the past 10 years, its dividend has risen from $0.24 per share in 2003 to $0.72 per share. Even with the increasing dividend, the company has tried to manage its payout ratio at a reasonable level. In 2012, the payout ratio stayed at 40.5%.
Peer comparison
At the current price of nearly $34 per share, Johnson Controls is worth around $23 billion on the market. The market is valuing Johnson Controls at 10.7 times EV/EBITDA. Compared to its peers, including Exide Technologies (NASDAQ: XIDE) and Invensys (NASDAQOTH: IVNYY), Johnson Controls is the largest company. Exide is trading at around $2.8 per share, with a total market cap of only $224 million. Invensys, at its current trading price of around $5.50 per share, is worth $4.5 billion on the market. While Invensys is valued at a valuation similar to that of Johnson Controls at 10.6 times EV/EBITDA, Exide has the cheapest valuation among the three at only 7.16 times EV/EBITDA.
Exide might deserve the low valuation due to its lowest operating margin at only 2%. Johnson Controls had an operating margin at 4%, whereas the operating margin of Invensys was the highest at 8%. Income investors might love Johnson Controls the most, as it is paying the highest dividend yield at 2.3%, while Invensys is paying investors a 1.3% dividend yield. Exide does not pay any dividend.
Looking forward
Going forward, Johnson Controls might benefit from two trends, a growing housing market for its Building Efficiency segment, and a growing automobile market for its Automotive Experience segment. The number of cars produced has been on the rise, from 58.3 million in 2010 to 60 million cars in 2012. In addition, North America and Asia accounted for 30.8% and 13.6% of the total revenue of the Building Efficiency segment, respectively. Johnson Controls might take advantage of the U.S. housing market recovery and increasing construction spending in Asia.
Foolish bottom line
With a leading global position, a terrific record of dividend payments, and a reasonable valuation, Johnson Controls could fit well in an income portfolio of a long-term investor.
hoangquocanh has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!
