Johnson Controls Capital Investments

Johnson Controls Capital Investments

Introduction

The purpose of this study is to expand the boundaries of our knowledge by exploring some relevant information relating to the analysis of Johnson Controls Capital Investment. Johnson Controls operates three businesses. The company is extremely well positioned over the course of a business cycle to be a leader in all three of its businesses i.e. the building efficiency segment, the automotive experience segment, the power solutions unit. Unfortunately, we expect the slowing business environment, particularly in Europe, U.S. buildings, and aftermarket auto batteries, to keep the stock down for the foreseeable future. Excluding $52 million of pretax restructuring charges ($41 million in buildings and $11 million in automotive) and a $22 million nonrecurring tax benefit, diluted EPS came in at $0.64 versus consensus expectations of $0.66. Record revenues of $10.6 million also missed expectations, which prompted a large sell-off in the stock. Revenue increased 2% year over year but was up 7% on a constant currency basis, not surprising given the stronger dollar versus the euro. Fourth-quarter guidance was revised down to only a 0%-5% year-over-year earnings growth rate compared with previous guidance of a double-digit percent improvement. Dividends are the primary means of returning cash to shareholders. The company has paid a dividend every year since 1887 and increased the dividend every year from 1975 to 2008. The payout ratio has generally been about 20%, but management intends to increase it to 30% during the coming years. The fiscal 2011 payout ratio was 25.4%, and the board declared a 12.5% quarterly dividend increase to $0.18 per share in November. Revenue increased every year for 62 years until fiscal 2009. The company has a long-standing policy of using cash to invest in growth via capital expenditures and acquisitions since management believes this are a better way to reward long-term shareholders compared to share repurchases (Bodiem 2011). In this paper, the author will suggest evaluation methods to reduce risk, assess the impact of inflation, and examine the benefits of sensitivity analysis in evaluating projects for Johnson Controls Capital Investment.

Discussion

Methods for evaluating the Capital Investment of Johnson Controls

The purpose of adapting traditional methods for evaluating the capital investment is to reduce risk while entering emerging markets. One of the most important aspects of corporate finance is the valuation of investments that a company should do before starting any enterprise. Analysis of the effectiveness of investment is made in close connection with the assessment of the overall economic activity of potential borrowers, in particular with the analysis of its financial situation. The positive results of the latter should be a precondition for Johnson Controls to engage in analysis of investment projects.

There are two types of methods that Johnson Controls can use to assess the effectiveness of the project (Hull, 2000):

Traditional methods (statistical)

Dynamic Methods

Traditional methods

In the traditional methods for assessing the effectiveness of investments, the most commonly used measures of are (Chan, 2002):

Payback period,

Simple rate of return

Payback Period: Payback period is the time after which ...