Page 6 - Evaluation - The Studies continued   [3 Go Back] 

The Sales Study
        Of all the fundamental data, a Company's Sales figures are the least likely to be distorted by one time events or accounting nuances. Sales are also directly related to Earnings and Cash Flow, so when a financially healthy company shows an increase in Sales, Earnings and Cash Flow can be expected to follow suit. Stock's to be on the look out for, belong to companies that are relatively young, not too big, not too small with at least a constant rate of Sales growth or even better, an increasing rate of growth. When evaluating Sales, a couple other things to watch for include:

• When a Company becomes very large, although the over all Sales quantity may still continue to increase, the growth rate of those Sales at some point will begin decreasing. If you hold a position in the Stock beware if the growth rate of Sales continues to deteriorate as the growth in the Stock price is sure to follow, or worse, actually decrease. 
• On the other hand, when Sales growth is holding steady but the growth in Earnings and Cash Flow are steadily declining, something is not right, be careful.

Sales Study Controls and Graph Elements
        The Sale data is represented by a blue line, with blue square hatch marks designating the end of each fiscal year of data history. The earlier discussions explaining the other 'Control' and 'Graph Element' items used on the Sales Study below can reviewed by clicking either of these two headings in the Table of Contents above.

Evaluating the Sales data
        In obtaining the requisite historic data for Data Entry, research also revealed that Johnson Controls has two primary lines of business. A supplier of seating, interior systems and batteries to the Automotive industry, and a supplier to the Commercial Construction industry of building control systems. Sales in the Automotive sector have been on the increase of late and represent over three quarters of the total income, the Commercial Construction sector making up the decreasing remainder.

        The Sales Graph above indicates a marked reduction in the rate of Sales growth from 1999 to the present, with a fairly consistent rate of both growth before and during this period. With the points on the graph forming a close to straight line between 1992 and 1999, and also between the years 1999 and 2002. As you will remember from the discussion on Logarithmic Graphs under 'Graph Type', a straight line on a log graph is indicative of a steady growth rate. Could this abrupt change in the growth rate be permanent, or is it a consequence of the slow down in the economy? The Automotive sector seems to have held up fairly well during the slowdown, but the Commercial Construction sector, which is extremely cyclical has definitely slowed down. Without further research this question cannot be answered definitively, although the change in the sales ratios, already noted, supports this contention. For the purpose of this evaluation we will assume that the future Sales trend will be at a pace greater than the years since 1999, but less than the growth experienced in the eight prior years. Using the Number of Years and Centering controls the rate of growth during the last four years of the data averaged about 6.2%. Adjusting the Growth rate and vertical Up/Down arrows puts the average Growth rate during the first eight years of data at just under 16%. Adjusting the Trend Line to a Growth rate of 10.9% and Then clicking the Centering button places the Trend Line in a position that appears to a reasonable trend for the next five years.

Future Projections from the Sales Study Evaluation
        All of the percentile values in the Future Projection feature relate to the future performance of the Stock Price. Therefore in the three Studies not directly related to Stock price data, the relationship between Stock price and the data being studied and evaluated must be established. 

        In the case of Sales, the values adjacent to the yellow dots on the Sales Study represent the projected future Sales. To convert these values to Share price we will look at the historic relationship between Johnson Control's Sales data and it's Share price. Just beneath the general description on the Future Projections page, the historic Stock Price / Sales ratios are displayed. This value ranges from a low of .28 to a high of .36. Using the average of .32, Equity Evaluator uses the projected Sales figures to calculate future Share prices by multiplying the future Sales projection values times the Price / Sales ratio. These projected Share prices are then used to calculate the values listed under the '5 year' and 'Annual' headings in the manner described in the Stock Price Future Projection. This discussion can be reviewed by accessing Individual Studies, Stock Price Study, Future Projections from the Table of Contents above.