NEW YORK (TheStreet) -- The last decade or two has been tough on auto-parts suppliers, as abundant vehicle assembly capacity worldwide has given automakers an upper hand in price negotiations, squeezing margins to the breaking point.
The announcement by Johnson Controls (JCI) on Wednesday to explore "strategic options" for withdrawing from its automotive businesses represented an admission by the company that it has lost out -- lately in its seating business -- to auto parts competitors like Lear (LEA), a maker of vehicle-seating systems.
Besides sticking to businesses in which the company can be a "global leader," Alex Molinari, CEO, said in a statement that Johnson Controls will be seeking $2 billion of cost savings through 2020. Molinari didn't wait for an activist investor to buy a stake and pressure the company to change.
About 40% of Johnson Controls' $22 billion in annual revenue is tied to its automotive seating business, which could fetch $9 billion based on its revenue and profit. The company accounts for about a third of the world's automotive seating revenue, along with Lear, Faurecia and Toyota Boshoku (TDBOF)
Johnson Controls shares rose 5% on the announcement, as investors cheered the fact the company has come to terms with giving up on a losing hand, namely a fruitless pursuit of automotive profit. The stock fell 1.1% in afternoon trading on Thursday. Lear stock, a potential beneficiary if Johnson Controls' seating business poses less competition, rose on the news.
Johnson Controls noted that it intended to intended to concentrate on its higher-margin heating and cooling business. Over the past five years, during which U.S. and foreign automakers have enjoyed steadily rising sales and pricing, the price of Lear shares climbed 250%, compared with Johnson Controls' stock price that increased 92% and a Dow Jones Industrial Average that rose 76%.
Another auto parts giant, Delphi Automotive (DLPH), based in Troy, Mich., went through similar soul searching following its 2005 bankruptcy and reorganization. Delphi decided to sell or close commodity parts businesses, involving items such as steering systems, and concentrate on higher-tech, higher-margin safety, infotainment and environmental parts.
The strategy has paid off handsomely. DLPH stock was priced at $21 a share at its initial public offering in November 2011. Since then, its share price has quadrupled, with once-bankrupt Delphi's market capitalization topping $25 billion.
Joseph Spak, equity analyst for RBC Capital Markets, said Johnson Controls has a couple of options for shedding its seating and auto parts business but they probably don't include a sale to Lear due to antitrust obstacles. Spak rates the stock outperform or buy and has a per-share price target of $60, representing a rise from its current level of about $53.
At 2:59 p.m. EDT, JCI shares were trading at 52.94, showing a decline of 1.21% for the day thus far.
Of 21 analysts who follow Johnson Controls, eight rate the company's shares buy or strong buy," down from nine in that category three months ago; 12 analysts rate the company a hold, down from 11; and one continues to rate it underperform or sell," according to Yahoo! Finance.