(09/23/2011) Last month our Investment Committee made the decision to swap holdings of Bemis, a leading packaging company, into Johnson Controls, a diversified manufacturer
of auto parts and building control systems.
This change was led by two factors. First, Bemis had not reaped the benefits we expected from its timely purchase of Alcan’s flexible food packaging business. We liked the acquisition and felt it would vault the company into a strong global leadership position and substantially improve profitability. The company delivered on the former, but not on the latter. Profit margins and returns on capital have not risen. In fact, most analysts have lowered their expectations on these fronts.
Johnson Controls, on the other hand, has boosted both measures to new decade highs despite only a gradual recovery in the auto industry – and they’ve done it with less debt.
A good question might be, why would anyone want to invest in a company that generates over one-half of its revenues and profits from the auto industry? Isn’t that sector well past its prime?
We actually see good growth ahead for auto manufacturers and their suppliers. Last year China became the largest auto consumer in the world. It and other growth countries are in the early stages of vehicle consumption. Meanwhile, car buyers in more mature markets are looking for greater safety, fuel efficiency, comfort, and a better environmental footprint.
Auto consumption in the U.S. is expected to approach 13 million vehicles over the next 12 months, a level that should grow through mid-decade. Johnson Controls already provides components to 30 million vehicles worldwide. Auto companies now build models on a world scale and expect strong suppliers to deliver parts around the globe. Johnson provides seating, interior, and door systems as well as electronics and battery technology. In just the past quarter, they completed 18 major launches for Ford Motor, KIA, Volkswagen, Tata Motors, Daimler AG, and Honda Motor.
A recent development is their advancement in start-stop batteries, a technology that shuts down and restarts an internal combustion engine to reduce the time it spends idling while stopped. This improves fuel economy and reduces emissions by 5-12%. Johnson plans to produce 2.4 million of these batteries annually by 2015 from plants in Germany, the United States, and China.
To demonstrate its socially-responsible characteristics, all you have to do is list its recent awards:
- #1 of Best Corporate Citizens in 2011 as ranked by CR magazine
- One of the World’s Most Ethical Companies named by Ethisphere magazine
- #14 among Greenest Big Companies in America in 2010 – Newsweek
- #1 most shareholder-friendly company in its industry by Institutional Investor
- Supplier of the year in 2010 – General Motors
- Sole source provider of automotive batteries in 2010 – Walmart
- #7 of top 100 U.S. firms as Military-Friendly Employer in 2011 – G.I. Jobs
- National Minority Supplier Development Council 2008 Corporation of the Year
It’s also been listed in the Dow Jones Sustainability Indexes: World and North America since 2005 and the FTSE4Good Index Series (Financial Times Stock Exchange) since 2004. Carbon Disclosure Project named it to its Carbon Leadership Indexes in 2008 and 2010.
While much of the economy is in a slow growth phase, the auto industry appears to be on a steady recovery path. It will take some time before production reaches pre-recession levels, but vehicle replacement demand will not suddenly disappear.
Johnson Controls has navigated tough times well, having recovered to new all-time high profit levels in 2011, two years after the recession. Its dividend has risen steadily in recent decades, now generating a yield of 2.1%, more than a 10-year U.S. Treasury note. Next year’s earnings per share are expected to rise 29%, many multiples more than the U.S. corporate average.
We believe this is a good time to participate in a rejuvenating global auto industry via a participant known for high ethical standards and investor-friendly practices. And, we’ve not even begun to talk about the company’s efforts to make buildings operate more efficiently. I bet you’d like me to stop here, though, before I go off in a new direction.
If you’d like more information on this company, or others on our SELECT List, just contact us. We’d love to let you know more about some of the world’s best corporate citizens.
Important Consumer Disclosure
This newsletter is limited to the dissemination of general information pertaining to Investors Asset Management, Inc.’s (“IAM”) investment advisory services and general economic market conditions. This communication contains general information that is not suitable for everyone. The information contained herein should not be construed as personalized investment advice, and should not be considered as a solicitation to buy or sell any security or engage in a particular investment strategy. Information presented herein is subject to change without notice and should not be considered as a solicitation to buy or sell any security. Past performance is no guarantee of future results, and there is no guarantee that the views and opinions expressed in this newsletter will come to pass. Individual client needs, asset allocations, and investment strategies differ based on a variety of factors.
The Select List represents all of IAM’s recommendations as of August 15, 2011. A list of all recommendations made by IAM within the immediately preceding one year is available upon request at no charge. IAM is under no obligation to hold any equity position for any time period, and the recommendations on the Select List are subject to change at any time without notice. The Select List should not be considered as personalized investment advice, and the securities information contained therein should not be construed as an endorsement, solicitation, or recommendation to purchase or sell any security. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment on the Select List, or any recommendations in the future, will be profitable.
IAM is an SEC registered investment adviser with its principal place of business in the State of Texas. IAM and its representatives are in compliance with the current registration and notice filing requirements imposed upon registered investment advisers by those states in which IAM maintains clients. IAM may only transact business in those states in which it is noticed filed, or qualifies for an exemption or exclusion from notice filing requirements. Any subsequent, direct communication by IAM with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides. For information pertaining to the registration status of IAM, please contact IAM or refer to the Investment Adviser Public Disclosure web site (www.adviserinfo.sec.gov). For additional information about IAM, including fees and services, send for our disclosure brochure as set forth on Form ADV using the contact information herein.
