Johnson Controls (NYSE:JCI) has long been one of my favorite energy efficiency picks, with an added bonus coming from their joint venture with Saft to produce batteries for hybrid and electric vehicles. They have also shown some energy saving innovation making parts for auto interiors. 
Building Efficiency
Efficient buildings are much more complex than simply replacing inefficient HVAC and lighting with more efficient versions. Quite often, the most cost effective measures come from using systems more efficiently. As an analogy to the home, look at any list of quick tips for energy saving around the home. This list of ten steps on Squidoo includes five tips for using existing equipment more wisely (programming your thermostat, cleaning air filters, loading your dishwasher fully, and only using the dryer when you can’t air-dry.) Considering Squidoo is quite clearly trying to make money by referring people to Amazon to buy products, it’s all the more significant that half of the steps need not involve buying anything.
In commercial and industrial buildings, the most economical gains also involve using existing equipment more wisely. They offer a full suite of products focused on automation and integration to businesses and residential (with the recent York acquisition) customers alike.
Building efficiency systems comprise about one third of 2007 revenues.
Batteries and Automotive Power Systems
Johnson Controls’ joint venture with Saft has been making headlines recently, no doubt in large part due to Johnson Controls automotive industry network. The partnership has won contracts to supply batteries to Chinese auto manufacturers Chery and SIAC for their Hybrid electric vehicles, and a battery development contract from GM to develop Li-ion batteries for GM’s Saturn Vue Green Line Plug-in Hybrid.
I’m extremely enthusiastic about the growth prospects of the automotive battery industry, the reasons for which I detailed in this article about another battery company, and this one about the long term prospects for cellulosic biofuels. The power systems division comprises about one third of 2007 revenues.
JCI also supplies automotive battery management systems and power systems, with a focus on energy savings, as part of their automotive division described below.
Auto interiors
Energy savings can come from unexpected places… like car seats. Johnson Controls’ EcoClimate seat provides much higher heat absorption and moisture absorption than conventional seating, which in turn provides for passenger comfort with less use of the vehicle’s air conditioner. New bio based materials may also appeal to automotive consumers concerned about environmental health effects and fossil fuel usage. About half of JCI’s 2007 sales were in this division, but most of the company’s growth comes from the other two divisions.
Conclusions
With half of the companies 2007 revenues coming from two of my favorite alternative energy sectors (efficient buildings and automotive batteries), and these parts of the company growing much more rapidly than the auto parts division (which is likely to be a great competitive advantage in selling batteries and power systems to automakers,) JCI is a must for alternative energy investors attracted by the superior economics of energy efficiency.
The stock has declined significantly since the start of the year, but it currently seems only fairly valued to me at the current price of around $34. However, a decline in auto sales caused by a slowing economy, along with an increased debt burden due to recent acquisitions could easily hurt short-term profits. With continued stock market weakness, patient investors could easily see some excellent buying opportunities in the next 6-12 months. If we do, I will be buying more.
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DISCLOSURE: Tom Konrad and/or his clients have long positions in JCI.
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