Saturday, October 1, 2011

Research: JCI Johnson Controls and its inability to outperform S&P500

JCI is a more interesting one. The year ending 2009 shows a 25% drop, or about 10 billion in revenue, which the 10k says is attributed to loss of sales as a result of the housing crisis. I feel that this is a reasonable explanation. With 10bn in shareholder equity and 15bn in total liabilities, this is a good example of how a highly leveraged business can suffer very drastic hits, even if the company is normally running well. We see that JCI had to issue a lot of stock for 2009 in order to get more cash to pad their working capital.

When it comes down to the numbers, I believe JCI is not a company which will outperform the market. The capital expenditures are too large. You can think of capital expenditures as expenses which are non-tax deductible, so they appear the cash statement instead of the income statement. This is the money you pay for expanding the business or making it better. Every year, the cap ex eats up around half of the operating cash. This is why you can see a 1.5bn profit for 2010 but only an increase of 900m increase in shareholder equity from 2009 to 2010. Cap ex are supposed to be for things like buying new equipment, opening new branches, getting new computers, etc, whereas normal expenses are like wages, rent, utilities, etc. Either way, it's money which needs to be spent and spending too much means you can't keep it for the shareholders.

While I believe JCI is a viable company (don't expect it to be in financial trouble tomorrow) I don't have high hopes of it consistently beating SPDRs.

And as we all know, if you can't beat SPDRs, just buy SPDRs to get the market return =p

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