Bleak Short-Term Outlook Overshadows Long-Term Value: Johnson Controls, Inc. (JCI), Honeywell International Inc. (HON), United Technologies Corporation (UTX)

It’s hard to find undervalued companies in this overheated market, but there are still a few stocks suffering from an undue discount due to short-term worries.

Johnson Controls, Inc. (NYSE:JCI) is a leading auto-parts supplier that is attempting to diversify its operations away from the cyclical auto industry. The company is trying to sell one of its automotive businesses, but the near-term outlook for the business as a whole is not great.

Honeywell International Inc. (NYSE:HON)

However, with several market-leading product lines, the company is in a position to achieve long-term success.

Market Leader

Although Johnson Controls, Inc. (NYSE:JCI) is heavily involved in the automotive interiors marketplace, it also has operations in HVAC systems and vehicle batteries.

The company is by far the largest HVAC service provider in the country — nearly three times the size of the next-largest competitor. This allows for superior economies of scale that give the company a competitive advantage.

In addition, the company’s start-stop batteries are considered the market leader in an industry poised for growth. Management has also made a large bet on lithium ion batteries — an investment that has yet to play out.

Most importantly, Johnson Controls has a strong balance sheet, which provides it some protection in the case of another downturn in the auto market. However, a sale of the automotive interiors business would go a long way toward reducing this cyclical imperative.

Competition

While Johnson Controls is trying to diversify into other areas, it will continue to face competition on all fronts. Honeywell International Inc. (NYSE:HON) is involved in the automotive transportation industry, but has successfully diversified into aerospace and other areas. The company is a major supplier of systems for the Airbus A350 and is a leading company in the aerospace systems market.

However, Honeywell International Inc. (NYSE:HON) has traditionally not distributed excess capital to shareholders, instead deciding to hold onto it for acquisitions and capital expenditures. Also, like Johnson Controls, Honeywell International Inc. (NYSE:HON) is overly reliant on one industry.

United Technologies Corporation (NYSE:UTX), on the other hand, is the most diversified of the three companies and is also in a good position to succeed going forward. The company has a number of growth opportunities overseas, although its potential growth is lower than that of Johnson Controls, Inc. (NYSE:JCI).

In addition, United Technologies Corporation (NYSE:UTX)’s revenues have yet to fully recover from the recession — a situation which should improve alongside the global economy. Finally, the company is making a large bet on its aerospace segment in a bid to gain market share and increase overall profitability.

The Long View

While Honeywell International Inc. (NYSE:HON) and United Technologies Corporation (NYSE:UTX) duke it out in the aerospace business, Johnson Controls, Inc. (NYSE:JCI) has the battery and HVAC systems to itself. This should allow the company to prosper over the long run, regardless of whatever short-term hurdles may arise.

The company trades at 14 times 2011 earnings per share and 8.4 times 2011 EBITDA per share. These multiples do not fully account for the company’s strong balance sheet and intention to sell the automotive interiors business. Once the segment is sold, expect a quick revaluation of the company’s shares as the market realizes Johnson’s strong value proposition.

The article Bleak Short-Term Outlook Overshadows Long-Term Value originally appeared on Fool.com and is written by Ted Cooper.

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