Johnson Controls' PS Unit Under Weak China Demand Pressure

Johnson Controls International plc (NYSE:JCI) expects the weakening automotive manufacturing in China to negatively impact the power solutions (PS) segment, per Reuters. The segment provides lead-acid batteries for vehicle production to the world’s largest automotive market. In a year, the PS unit of Johnson Controls delivers roughly 154 million battery units for the manufacturing of passenger cars and light trucks in China.

The PS segment generates most of its revenues by selling replacement batteries while generating remaining revenues by selling batteries for new vehicle production. In fiscal 2018, the unit’s sales in China accounted for roughly 7%.

Weakening consumer demand, along with tariff wars, weakened China’s economy in 2018. Beside Johnson Controls, many other companies within the automotive industry have also agreed that the slowing auto production in the world’s largest market will hamper sales.

Johnson Controls International plc Price and Consensus

Johnson Controls International plc Price and Consensus | Johnson Controls International plc Quote

In November, Johnson Controls announced the sale of its PS business to Brookfield Business Partners L.P. and institutional partners for $13.2 billion in cash. Depending on regulatory approvals and closing conditions, the transaction is anticipated to close by Jun 30, 2019.

Apart from the PS unit, the company operates under another segment, which is building technologies & solutions. In fourth-quarter fiscal 2018, both segments witnessed year-over-year rise in revenues, aiding the company to generate quarterly revenues of $8.4 billion and adjusted earnings per share of 93 cents.

The sale of the PS unit will aid Johnson Controls to redirect its focus on the building technologies & solutions segment beside improving the free cash flow. The company targets to improve and deliver strong free cash flow in 2019.

While announcing reports for the fiscal year, Johnson Controls informed that it is anticipating continued strength in 2019 similar to 2018, on the back of healthy end-market demand. Further, it expects adjusted free cash flow conversion to be approximately 90%. The company is set to release first-quarter fiscal 2019 earnings on Feb 1.

Price Performance

Over the past month, shares of Johnson Controls have gained 14.2% compared with the industry’s increase of 15.6%.

Zacks Rank & Stocks to Consider

Johnson Controls currently carries a Zacks Rank #4 (Sell). Some better-ranked stocks in the broader auto sector are Dana Incorporated (NYSE:DAN) , Cooper Tire & Rubber Company (NYSE:CTB) , and Bridgestone Corporation (OTC:BRDCY) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Dana has an expected long-term growth rate of 2.9%. Share price of the company has increased 33.3% in the past month.

Cooper Tire has an expected long-term growth rate of 4%. Over the past month, shares of the company have gained 10.5%.

Bridgestone has an expected long-term growth rate of 4.7%. Shares of the company have gained 1.6% in the past month.

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