JCI Meeting Reinforces Confidence in Battery
Johnson Controls hosted an Analyst Meeting in which they provided a deep
dive into the business outlook for their Power Solutions division (14.5% of
2011E sales; 33% of 2011 earnings). Overall, we thought that the company
presented a relatively convincing case to support expectations of 10%-12%
growth over the next 3-4 years. Part of this growth is expected to come
from Emerging markets--JCI's China business alone could grow to 23 MM
units by 2015 (30% of a 76 MM market), up from 4 MM in 2010. We estimate
that this 19 MM units of growth could add ~$740 MM of top line
growth, (compares with a $4.9 bn/125 MM unit base business for all of JCI
Power Solutions in 2010). If spread evenly over 5 years, this opportunity
alone could add 2%-3% annual growth for JCI's Power Solutions division.
Perhaps even more significantly, JCI believes that it is on the cusp of very
significant growth in its advanced lead acid battery technology, driven by a
shift towards increased vehicle electrification. The first phase of this growth
will involve the adoption of vehicle start-stop systems (i.e. Systems that turn
off the engine when a vehicle is at rest in order to save fuel/reduce CO2,
and instantly restart the engine when it is needed for propulsion). Projected
adoption rates for such systems were revised higher, in part because of
increasingly stringent fuel economy regulations, and partly because consumers
appear to like the technology. Today, only 8% of the world vehicle
market features start-stop technology. By 2016, JCI projects that 52-55%
will include start-stop tech. By 2020, 70%-92% may be start-stop. The benefit
for JCI comes from the fact that start-stop systems require more robust
lead acid batteries, which are capable of frequent, deep discharges. JCI's
Absorbent Glass Mat (AGM) battery technology is currently being used on
80% of these systems. These batteries sell for 2x the average price of a
traditional flooded lead acid battery, and they are achieving 3x the average
profit margin. On a back of the envelope basis, we estimate that JCI's plans
to increase AGM production capacity to 18 MM units (vs. 2.5 MM in 2010)
could add $1.2 bn to JCI's revenue. This alone could add 4%-5% to annual
top line growth (for the Power Solutions division) over the next few years.
Johnson Controls hosted an Analyst Meeting in which they provided a deep
dive into the business outlook for their Power Solutions division (14.5% of
2011E sales; 33% of 2011 earnings). Overall, we thought that the company
presented a relatively convincing case to support expectations of 10%-12%
growth over the next 3-4 years. Part of this growth is expected to come
from Emerging markets--JCI's China business alone could grow to 23 MM
units by 2015 (30% of a 76 MM market), up from 4 MM in 2010. We estimate
that this 19 MM units of growth could add ~$740 MM of top line
growth, (compares with a $4.9 bn/125 MM unit base business for all of JCI
Power Solutions in 2010). If spread evenly over 5 years, this opportunity
alone could add 2%-3% annual growth for JCI's Power Solutions division.
Perhaps even more significantly, JCI believes that it is on the cusp of very
significant growth in its advanced lead acid battery technology, driven by a
shift towards increased vehicle electrification. The first phase of this growth
will involve the adoption of vehicle start-stop systems (i.e. Systems that turn
off the engine when a vehicle is at rest in order to save fuel/reduce CO2,
and instantly restart the engine when it is needed for propulsion). Projected
adoption rates for such systems were revised higher, in part because of
increasingly stringent fuel economy regulations, and partly because consumers
appear to like the technology. Today, only 8% of the world vehicle
market features start-stop technology. By 2016, JCI projects that 52-55%
will include start-stop tech. By 2020, 70%-92% may be start-stop. The benefit
for JCI comes from the fact that start-stop systems require more robust
lead acid batteries, which are capable of frequent, deep discharges. JCI's
Absorbent Glass Mat (AGM) battery technology is currently being used on
80% of these systems. These batteries sell for 2x the average price of a
traditional flooded lead acid battery, and they are achieving 3x the average
profit margin. On a back of the envelope basis, we estimate that JCI's plans
to increase AGM production capacity to 18 MM units (vs. 2.5 MM in 2010)
could add $1.2 bn to JCI's revenue. This alone could add 4%-5% to annual
top line growth (for the Power Solutions division) over the next few years.
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