Takeaways from Bullish Battery Analyst Day

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1 AUTO & TRUCK MANUFACTURING Sector Weighting Market Weight JOHNSON CONTROLS INC. (JCI $39.52 Outperform) Takeaways from Bullish Battery Analyst Day Upbeat, In-Depth Power Solutions (PS) Analyst Day. Yesterday, JCI hosted an analyst meeting with a deep dive into its PS division, which makes up 14% of F11E rev but 33% of F11E EBIT. Overall, the meeting was roughly in line with our expectations with no major surprises, but JCI provided lots of incremental details and made a strong case for its ability to defend its dominant AGM market position. Start-Stop Market Potential Still Improving. JCI now sees the global start-stop market, incl. aftermarket, growing to almost 40M units by F15, vs its current 18Munit capacity plan. Though a small share (we est 5%) of this may use lower-cost flooded batteries, at 80% AGM market share we estimate ~30M units in F15 for JCI, with the upside largely from China where JCI is finalizing plans and expects to make an announcement soon. Accelerating AGM Growth Led By OEM Pipelines. In NA, JCI now expects 60% of production to be start-stop by F15 incl. GM, up from 40% previously, and in China, JCI sees SAIC (GM, 14% YTD share), Chery (4% YTD share) and BYD (3% YTD share) with new plans for start-stop hybrids, though it still has no official capacity planned. AGM Adoption Pushing Electric Vehicles Out. Mgmt made it clear that OEMs are de-emphasizing lithium-ion in favor of start-stop thru F15, raising the hurdle for EVs down the road. However, the goals of JCI s legal fight to dissolve its lithium-ion JV with Saft are to provide operational flexibility, evolve technologically, involve other partners and to develop lithium-ion batteries for its buildings business. Trading and Fundamental Data Target Price YE 11 $46 52-Week Range $26-$43 Market Cap. ($M) $27,190 Shares Out. (M) Dividend/Yield $0.64/1.6% Avg. Daily Vol. (000) 4,810 Total Debt / Total 29.3% Cap Net Debt / EBITDA 1.4x Short-Interest Ratio 1.2 % of Float 0.8% Book Value $16 Free Cash Flow Yield -1.1% Price Performance YTD LTM JCI 3% 43% Auto & Truck Index - -4% 33% ex-jci S&P 500 2% 19% Jul Sep Nov Jan Mar May Reiterate Outperform. Following JCI s meeting, we have more conviction in the $1- $1.25 of PS-related EPS growth in the next 3-4 years that we estimated last week. While the focus on PS has raised investor concerns about the performance of its other two segments, we see PS as JCI s best secular growth story, justifying the attention. We are leaving our above-cons EPS estimates and $46 yr-end Target Price unchanged. EPS (US$) FYE 9/30 1Q 2Q 3Q 4Q FY FC Cons P/E 2010 $0.43 $0.43 $0.54 $0.60 $ E E 0.78E 2.44E 2.44E 16.2x 2012E 3.37E 3.26E 11.7x FC Cons = First Call Consensus, P/E based on WT estimates. Timothy J. Denoyer (646) TDenoyer@WolfeTrahan.com DO NOT FORWARD DO NOT DISTRIBUTE DOCUMENT CAN ONLY BE PRINTED TWICE This report is limited solely for the use of clients of Wolfe Trahan & Co. Please refer to the DISCLOSURE SECTION located at the end of this report for Analyst Certifications, Important Disclosures and Other Disclosures. WolfeTrahan.com Page 1 of 5

2 Investment Conclusion JCI was up 0.9% yesterday, in line with the S&P 500 but below a 1.1% increase for our Auto & Truck Manufacturing coverage ex-jci as it hosted its analyst meeting throughout the day. Last week, JCI rose 5.6% versus a 0.2% decline for the S&P 500 and a 4.4% increase in our Auto & Truck Manufacturing coverage ex- JCI. JCI provided a vast amount of detail about its battery business yesterday, including several incremental positives that increase our confidence in our estimate of $1-$1.25 of EPS growth from the PS segment over the next 3-4 year which we laid out last week. Given the better visibility towards 30M units of AGM in F15, directionally we now expect PS segment EPS growth at least at the midpoint of this range. Our above-consensus F12 EPS estimate of $3.37 versus consensus $3.26 includes a strong recovery in auto production, which is largely timing-related as we expect Japanese OEMs to be rebuilding inventory at the beginning of JCI s Sept-end fiscal year, but our PS assumptions are a larger reason we see upside to F12 consensus. While JCI is still producing very few AGM batteries this year (2.5M-3M units), in F12 the 7M units of capacity being put in place in Germany will ramp up, providing roughly $0.07 of incremental EPS, while we estimate Chinese growth and margin expansion from increased lead recycling will add $0.06 and $0.10. Although most of yesterday s discussion was very long-term in nature, we would not be surprised if F12 consensus rose somewhat following the meeting. While increased focus on secular battery growth risks losing focus on JCI s underperforming European auto business and its slowly recovering buildings business which both carry significant cyclical risk, we believe JCI s secular PS growth story and diversified business model justify a premium valuation. At 13.3x forward P/E, Outperform-rated JCI is currently trading at a 15% premium to the group, versus BWA s 15.8x forward P/E, which we find less attractive at a 45% premium to the group even with a stronger secular growth argument. While JCI underperformed for part of last year when the economy was accelerating, it has outperformed YTD in a slowing economy and over the past year. We retain our Outperform rating on JCI as we expect this to continue even as cyclical risk seems to be rising. JCI is currently trading at 13.3x and 8.8x our forward rolling EPS and EBITDA estimates. This is generally below its 1-, 5-, and 10-year average forward P/E multiples of 13.4x, 14.3x, and 13.4x, and average EV/EBITDA multiples of 9.7x, 8.8x, and 7.7x. JCI s forward P/E has historically troughed around 9x-10x on peak EPS, which we believe is reasonable on roughly $5 of peak EPS in F14 or F15, supporting a stock price in the $45-$50 range. This is similar to our $46 year-end target price which is based on a mid-cycle P/E of 14x on our C12 EPS estimate of $3.32. Key Points Expanded PS Analyst Meeting Highlights Strong Secular Growth with More Good News to Come. The two main secular drivers of PS earnings growth AGM (Absorbed Glass Mat) batteries and standard leadacid growth in emerging markets were the main focus, but there was also a substantial amount of time devoted to lithium-ion batteries for electric vehicles which are no longer expected to gain much traction until later this decade. As shown in Exhibit 1, we believe JCI has opportunity to raise its current 18M unit AGM capacity plan for F15 to as much as 30M units given the strong consumer adoption of start-stop, dominant market share and few competing technologies. Given the increased visibility on start-stop WolfeTrahan.com Page 2 of 5

3 hybrids, we believe it is reasonable to expect AGM to drive 5pp-6pp of PS revenue growth per year and slight margin expansion. Although JCI says AGM has 3x the margin dollars of lead-acid, a $100 AGM battery with $15 of EBIT (15% margin) is only slightly better in percentage terms than JCI s current 13% EBIT margin, which is roughly $5 of EBIT on a $40 battery on average. We believe JCI s case for maintaining its dominant AGM market share of about 80% also came through well. JCI s first-mover advantage in AGM (its Varta brand has been building them on a small scale since 2001), its close relationships with all major auto OEMs and its 36% market share in the global automotive battery market (GS Yuasa and XIDE are next largest with <10% each) all support the case. Its established competitors are unable to commit the capital that JCI is deploying, and new entrants are unlikely to gain OEMs trust. PS next largest earnings driver, emerging markets led by China, was also in focus, with plans to expand from 3M-4M units of capacity in F10 to 30M in F15 are on track and JCI expects the Chinese government s closure of about 300 battery plants in the past few weeks to mark the start of a trend of closing about 1,500 environmentally toxic plants through 2014, supporting JCI s growth. Exhibit 1. JCI s AGM Battery Planned Capacity and Start-Stop Market Growth Outlook Total AGM Capacity* Start-Stop Demand Units (millions) E 2013E 2014E 2015E * Includes current capacity and approved extensions. Source: Company reports; Wolfe Trahan & Co. WolfeTrahan.com Page 3 of 5

4 DISCLOSURE SECTION Analyst Certification: The analyst of Wolfe Trahan & Co. primarily responsible for this research report whose name appears first on the front page of this research report hereby certifies that (i) the recommendations and opinions expressed in this research report accurately reflect the research analysts personal views about the subject securities or issuers and (ii) no part of the research analysts compensation was, is or will be directly or indirectly related to the specific recommendations or views contained in this report. Important Disclosures: Price Chart with Ratings and Target Price History Note: OP = Outperform; PP = Peer Perform; UP = Underperform Wolfe Trahan & Co. Fundamental Stock Ratings Key: Outperform (OP): The security is projected to outperform analyst's industry coverage universe over the next 12 months. Peer Perform (PP): The security is projected to perform approximately in line with analyst's industry coverage universe over the next 12 months. Underperform (UP): The security is projected to underperform analyst's industry coverage universe over the next 12 months. Wolfe Trahan & Co. uses a relative rating system using terms such as Outperform, Peer Perform and Underperform (see definitions above). Wolfe Trahan & Co. does not assign ratings of Buy, Hold or Sell to the stocks it covers. Outperform, Peer Perform and Underperform are not the respective equivalents of Buy, Hold and Sell. Please carefully read the definitions of all ratings used in Wolfe Trahan & Co. research. In addition, since Wolfe Trahan & Co. research contains more complete information concerning the analyst s views, please carefully read Wolfe Trahan & Co. research in its entirety and not infer the contents from the ratings alone. In all cases, ratings (or research) should not be used or relied upon as investment advice and any investment decisions should be based upon individual circumstances and other considerations. Wolfe Trahan & Co. Fundamental Sector Weighting System: Market Overweight (MO): Expect the industry to outperform the primary market index for the region (S&P 500 in the U.S.) by at least 10% over the next 12 months. Market Weight (MW): Expect the industry to perform approximately in line with the primary market index for the region (S&P 500 in the U.S.) over the next 12 months. Market Underweight (MU): Expect the industry to underperform the primary market index for the region (S&P 500 in the U.S.) by at least 10% over the next 12 months. WolfeTrahan.com Page 4 of 5

5 Wolfe Trahan & Co. Distribution of Fundamental Stock Ratings (As of March 31, 2011): Outperform: 34% 6% Investment Banking Clients Peer Perform: 47% 0% Investment Banking Clients Underperform: 19% 0% Investment Banking Clients Wolfe Trahan & Co. does not assign ratings of Buy, Hold or Sell to the stocks it covers. Outperform, Peer Perform and Underperform are not the respective equivalents of Buy, Hold and Sell but represent relative weightings as defined above. To satisfy regulatory requirements, Outperform has been designated to correspond with Buy, Peer Perform has been designated to correspond with Hold and Underperform has been designated to correspond with Sell. Wolfe Trahan & Co. Fundamental Valuation Methodology: Fundamental Valuation Methodology: Forward P/E Wolfe Trahan & Co. Fundamental Target Price Risks: Fundamental Target Price Risks: Economic slowdown; Commercial real estate weakness; Auto demand cyclicality; Loss of auto interiors market share Wolfe Trahan & Co. Research Disclosures: Research Disclosures: None Other Disclosures: The content of this report is to be used solely for informational purposes and should not be regarded as an offer, or a solicitation of an offer, to buy or sell a security, financial instrument or service discussed herein. Opinions in this communication constitute the current judgment of the author as of the date and time of this report and are subject to change without notice. Information herein is believed to be reliable but Wolfe Trahan & Co. and its affiliates, including but not limited to WR Securities, LLC, makes no representation that it is complete or accurate. The information provided in this communication is not designed to replace a recipient's own decision-making processes for assessing a proposed transaction or investment involving a financial instrument discussed herein. Recipients are encouraged to seek financial advice from their financial advisor regarding the appropriateness of investing in a security or financial instrument referred to in this report and should understand that statements regarding the future performance of the financial instruments or the securities referenced herein may not be realized. Past performance is not indicative of future results. This report is not intended for distribution to, or use by, any person or entity in any location where such distribution or use would be contrary to applicable law, or which would subject Wolfe Trahan & Co. or any affiliate to any registration requirement within such location. For additional important disclosures, please see The views expressed in Wolfe Trahan & Co. fundamental research reports with regards to sectors and/or specific companies may from time to time be inconsistent with the views implied by inclusion of those sectors and companies in Wolfe Trahan & Co. portfolio strategy and quantitative research modeling screens. Copyright Wolfe Trahan & Co All rights reserved. All material presented in this document, unless specifically indicated otherwise, is under copyright to Wolfe Trahan & Co. None of the material, nor its content, nor any copy of it, may be altered in any way, or transmitted to or distributed to any other party, without the prior express written permission of Wolfe Trahan & Co. This report is limited for the sole use of clients of Wolfe Trahan & Co. Authorized users have received an encryption decoder which legislates and monitors the access to Wolfe Trahan & Co. content. Any distribution of the content produced by Wolfe Trahan & Co. will violate the understanding of the terms of our relationship. WolfeTrahan.com Page 5 of 5