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Earnings Breakdown: EMC, Johnson Controls

Both of these stocks deserve a buy in my book


EMC (NYSE:EMC) jumped 7% Tuesday after reporting Q4 earnings of 49 cents per share and $5.57 billion in revenues — exceeding expectations of 46 cents and $5.49 billion, respectively. Margins were up on the 14% increase in revenue, but the company also continues to invest heavily in the future and saw R&D expenses rise 14%. Non-GAAP net income was up 16%.

EMC continues to benefit from IT departments at corporations spending more on cloud computing, and the company also continues to pick up market share in both high- and mid-range storage. One of the appeals to owning EMC is that it owns 80% of VMWare (NYSE:VMW), which the company believes has become the industry standard for virtualization — a pooling of multiple network storage devices into a single device managed from a central console. As you might have seen, VMW also reported strong earnings and saw its shares pop 7%.

On the earnings conference call, management announced veteran Chairman and CEO Joseph Tucci, who did a great job of leading the company after the tech bubble exploded, will defer his retirement by one year and stay through 2013. The board had urged him to stay on longer, which was a smart request, and he agreed.

EMC’s guidance for 2012 was in line with current expectations of $22 billion in revenues and adjusted earnings of $1.70 per share. That would be growth of 10% and 12.6%, respectively, which is slower than the 18% and 20% growth in 2011. With this slower growth already priced in — perhaps too much so — the stock’s current valuation of 14.5 times 2012 estimates remains attractive. EMC is has popped nearly 20% so far this year, and I believe it will continue to move higher in an improved tech environment. 

Johnson Controls (NYSE:JCI) reported mixed Q1 results. Earnings and revenues were up, but in the near term, the company expects some bumpiness the next few quarters and lowered full-year 2012 guidance to $2.70 to $2.85 a share — down from $2.85 to $3.00. However, management still expects to report record results for the year and says long-term growth prospects remain in place.

Let’s break down the numbers. Earnings for the quarter were 60 cents per share, up from the 55 cents of a year ago but below estimates of 62 cents. Revenue rose 9%, which management believes was better than its competitors’ — a sign that the company gained market share.

Operating income was up just 2.4% in the quarter, and JCI had to rely on higher income from joint ventures to obtain the 9% gain in earnings. The company is hoping to improve this by eliminating $150 million in costs, primarily from the Building Efficiency Segment, where income declined 4% (to $133 million) despite a 4% increase in sales (to $3.5 billion). The company also has hired 300 Six Sigma black belts (experts certified in what’s called Six Sigma strategy to improve industrial processes) and efficiency experts to obtain better margins in the Automotive Experience segment, where revenue increased 15% to $5.3 billion, but income increased only 10%. This was due in part to the Thailand flood and start-up costs for a new North American metals business. Margins were better in the Power Solutions segment, where sales increased 4% to $1.6 billion but earnings increased 24% to $271 million, helped by a better product mix and strong results from a Chinese joint venture.

As I mentioned, JCI reduced its 2012 outlook, and management expects the biggest hit to come in its second quarter (the current quarter) and lowered earnings guidance accordingly to 42 cents to 54 cents, well below estimates of 70 cents. The change is primarily because of lower-than-expected automotive production in Europe, lower battery sales thanks to warmer winter weather, slumping demand for residential HVAC products in Europe and the United States and a delay in the reopening of a battery plant in Shanghai. It’s important to note that some of these factors will improve after the second quarter, especially the weather-related weakness in battery sales, and the company’s cost savings will start to kick in.

While the results were somewhat disappointing, they were not all that surprising. The market was already looking for some downward revision in guidance, and I would not be surprised to see similar misses from other global manufacturers. The keys for me are the company is taking proactive measures for improvement, gaining market share and will still likely report record earnings for the year.

JCI fell 8.7% last Thursday after the results were released. It has since stabilized, and I view the current weakness as a good buying opportunity in a company still poised to have a strong 2012.

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