Wednesday, September 24, 2008

* Stock Analysis: Johnson Controls (JCI)

Linked here is a PDF copy of my detailed analysis of Johnson Controls (JCI). Below are some highlights from the above linked analysis: Company Description: Johnson Controls Inc. supplies building controls and energy management systems, automotive seating, and batteries.
Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description:
  1. Avg. High Yield Price
  2. 20-Year DCF Price
  3. Avg. P/E Price
  4. Graham Number
JCI is trading at a discount to only 3.) above. If I exclude the high and low valuations and average the remaining two, JCI is trading at a 10.7% premium. JCI had a Star deducted for trading at a premium in excess of 5%. Dividend Analytical Data: In this section I consider five factors, see page 2 of the linked PDF for a detailed description:
  1. Rolling 4-yr Div. > 15%
  2. Dividend Growth Rate
  3. Years of Div. Growth
  4. 1-Yr. > 5-Yr Growth
  5. Payout 15% of avg.
JCI earned one Star in this section for 3.) above. JCI has paid a cash dividend to shareholders every year since 1887 and has increased its dividend payments for 33 consecutive years. Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA)? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:
  1. NPV MMA Diff.
  2. Years to >MMA
JCI earned no Stars in this section, and had one Star deducted for a negative NPV MMA Diff. The negative NPV MMA Diff. means that on a NPV basis for every $1,000 invested in JCI you would earn $855 less than a MMA earning a 20-year average rate of 4.61%. If JCI grows its dividend at 13.0% per year, it will never equal the cumulative earnings from a MMA yielding an estimated 20-year average rate of 4.61%

Other: JCI is a member of the S&P 500, a Dividend Aristocrat and a member of the Broad Dividend Achievers™ Index. JCI is a well-managed company with a strong balance sheet. In the near-term, the weak domestic auto market will be a drag on JCI's results. Other concerns include higher costs for raw materials and pricing pressure from customers.. 

 Conclusion: JCI lost one Star in the Fair Value section, earned one Star in the Dividend Analytical Data section and lost one Star in the Dividend Income vs. MMA section for a net total of negative one Star. Since my scale bottoms out at zero, this quantitatively ranks JCI as a 0 Star-Avoid stock.  

Using my D4L-PreScreen.xls model, I determined the share price would have to drop to $23.84 before JVI's NPV MMA Diff. increases to the $3,000 NPV MMA Diff. that I like to see. At that price JCI would yield 2.18%.

Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the $3,000 NPV MMA Differential I'm looking for, the calculated rate is 16.6%. This dividend growth rate is well above the 13.0% used in this analysis. JCI won't find its way into my income portfolio with results like this.

Disclaimer:  Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.

Full Disclosure: At the time of this writing, I had no position in JCI (0.0% of my Income Portfolio) . What are your thoughts on JCI?