Johnson Controls investors have watched their stock put in a strong recovery in the last month, and the share price is only down a few percentage points on the year, as I write. About a month ago, Fools looked at just why the stock had slumped in 2014 , and more recently at the five things management hopes will improve company performance. Now, it's time to look at things from another perspective and ask: What are the three things that could take the stock higher?
The bullish case for Johnson Controls
In order to put the following arguments in context, here is a look at segmental income for 2014. It's pretty evenly split among the three segments, but keep in mind that power solutions (automotive batteries) and automotive experience (car seating and interiors) are both focused on the auto market.
Source: American Institute of Architects; a reading above 50 indicates expansion.
Moreover, with the planned divestiture of its facilities management business, Global Workplace Solutions, or GWS, the importance of its North American operations is going to increase. For example, in the first nine months of 2014, its North American systems and service operations accounted for 55% of building efficiency segmental income. However, stripping out GWS from the total would see it increase to more than 60%.
In other words, if the GWS divestiture goes as planned, then Johnson Controls will see an improving North American institutional market have a bigger weighting within its profit mix.
Free cash flow improvement
It's well known that Johnson Controls management would like to improve its free cash flow generation . Indeed, investors should warm to this aim, because it's an area that has proved disappointing in the past. For example, back in August, management had predicted that full-year free cash flow would come in at $1.6 billion (the company's year end is in September). In addition, free cash flow was forecast to be $1.7 billion and $2 billion in 2015 and 2016, respectively.
In reality, free cash flow only came in at $1.5 billion for 2014, and that includes $265 million from the divestiture of its car electronics business.
It will be interesting to see what management says on the issue in its forthcoming financial analyst meeting on Dec. 2, because its current forecasts imply a significant increase in free cash flow conversion from revenue.
Management has gone on record as to increase to at least 7% in the next few years. Such figures would mark a continuation of a remarkable turnaround in the segment's fortunes.
Source: Morningstar Research, Google Finance, author's analysis. 2014 figures exclude contribution from electronics divestiture.
Auto Experience margins
Management has gone on record as aiming for auto experience segment margins to increase to at least 7% in the next few years. Such figures would mark a continuation of a remarkable turnaround in the segment's fortunes.
Source: Johnson Controls Presentations.
In addition, auto experience segment margin came in at 4.7% in the fourth quarter.
It's difficult to make precise estimates, but some back-of-envelope calculations will reveal the potential for income growth in the segment. For example, assuming that the segment's revenue grows 5% per year and 7% margin is hit in 2018, then auto experience segment income would be around $1.87 billion in 2018 -- some 111% higher than in 2014.
Putting these elements together, it's clear that Johnson Controls could see an improvement in its building efficiency segment in the next year or so. Thinking longer term, the opportunity for improvement in margin expansion -- particularly in auto experience -- and free cash flow conversion overall is tangible. If these upside drivers come into place for the company, then the stock could go higher from here.
Apple Watch revealed: The real winner is inside
Apple recently revealed the product of its secret-development "dream team" -- Apple Watch. The secret is out, and some early viewers are claiming its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early in-the-know investors. To be one of them, and see where the real money is to be made, just click here !
The article 3 Reasons Johnson Controls Stock Could Go Higher originally appeared on Fool.com.
Lee Samaha has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Apple. 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 .
Copyright © 1995 - 2014 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy .
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
