“Today’s announcement continues our strategy of proactive portfolio management to drive focus on strategic product-oriented businesses where we can be a global market leader, drive more profitable growth and deliver maximum long-term value for our customers and shareholders,” said Alex Molinaroli, chairman and chief executive officer, Johnson Controls. “I am very pleased that we are consistently delivering on our operating commitments while also building a strong foundation for growth by leveraging our Johnson Controls Operating System (JCOS) across the company.”
Wow, that’s a lot of words without saying anything. The company gave no timetable for the review, but it “has engaged Goldman Sachs and Centerview Partners to serve as financial advisors, and Wachtell, Lipton, Rosen and Katz to serve as legal advisor in connection with this strategic review.”
Forbes weighs in on the review, calling it “logical”.
Although Johnson Controls’ automotive business products like seats, power-roofs, floor consoles, door panels, and driver instrumentation account for over 50% of the company’s revenue – some $22 billion in annual sales out of a total of nearly $43 billion – they are a laggard in profits and overall margins. Johnson Controls earned just $886 million in operating income from its automotive businesses, making the division rank behind its far smaller power solutions and building efficiency operations, which generated $1.1 billion and $930 million in operating income in 2014, according to data compiled by Bloomberg.
A strategic review also makes sense because Johnson Controls, a strong stock market performer over the years, is at risk of beginning to lag broader indices. Prior to Wednesday, Johnson Controls’ share price gain of just over 3% was well behind the S&P 500′s near 10% gain over the past 12-months. Over a three-year period, it was slightly ahead of the S&P 500, however, over a five-year period the company’s share price return, excluding dividends, was in line with the broad market index.
An attentive management team would take that performance as a cue to search for new ways of driving shareholder value, and Johnson Controls is well underway.
It is telling that in an environment of record auto sales and strong performance from auto manufacturers, Johnson is unable to deliver compelling profitability in this business. Now may indeed be the time to separate this business.
Disclosure: The author holds no position in any stock mentioned