The auto parts sector is known for its competitiveness and cyclical behavior, which can affect the long-term economic sustainability of a stock. With big competitors in this industry such as TRW Automotives Holdings Corp (TRW, Financial) and Allison Transmission Holding Inc (ALSN, Financial), BorgWarner Inc (BWA, Financial) is leading the way in terms of innovation according to the new ecologic trend of the automotive industry.
BWA is an auto-parts supplier that operates in two segments: manufacturing engine supplies that reduce emissions, and DCT (dual-clutch technology) transmissions. The engine segment is accountable for 70% of the company’s sales, and is thus largely responsible for the firm’s total revenue rising up to $7 billion. This company is focused on improving fuel efficiency and reducing emissions for its customer’s products. Thus, making long-term economic profitability in an increasingly ecologically concerned industry is what is expected for this company.
Capitalizing on industry trends
As mentioned above, the auto industry is on the path to produce cleaner and more fuel-efficient cars. This is why BorgWarner sees a profitable future on the horizon.
With a rising demand for lower emissions and fuel efficiency, the firm’s turbochargers, produced by the engine segment, and its DCT transmissions, are a cost-effective option for OEM’s. For example, the transmissions produced by BWA can improve fuel saving up to 5%-15%.
Hence, management anticipates that the global turbocharger market will grow yearly at a 10% rate in 2018. This optimistic projection also applies to the DCT transmission segment of the company. This should lead to an annual revenue growth of approximately 7% in the next five years.
The benefits of having an economic moat
BWA’s narrow economic moat stems from its high customer switching costs and its long standing customer ties. This company has also benefitted from its innovative nature, which helped it to be in accordance with the industry´s new ecological trend.
The list of BorgWarner’s top customers includes some big fishes such as: Volkswagen (VLKAY, Financial), Daimler (DDAIF, Financial), and Ford (F, Financial). These companies make up for one third of BWA’s revenue and as mentioned above, have to deal with high customer switching costs.
Countering bussines cycles
The European auto industry has suffered many difficulties, that where brought on by the economic plummeting of the past years. Nevertheless, Europe made up about 49% of BWA’s total revenue last year. An interesting fact shows us that in 2013, the company´s revenue increased 4% while European light-vehicle demand shrunk by 2%. This means that in difficult times, BorgWarner managed to stay profitable.
Conclusion
I feel bullish about this stock, even though it trades at a 29% premium relative to the industry average. The reason for that is that we are dealing with a profitable growth stock.
I find that BorgWarner is a great value-investment opportunity. Its revenue growth is at 13.8%, while the mean of the industry is 9.4%. The company’s EPS growth is a good 20,7 % which makes this stock rank in the top 2% of its industry segment. This year’s projections show an EPS range of $3.10-$3,25, a fair operating margin of at least 12,5% and a organic sales growth rate of 7%-11%.
In addition, the Wahler acquisition is estimated to bring annual revenue up by $350 million. And, knowing that investment gurus such as Ray Dalio (Trades, Portfolio) and Joel Greenblatt (Trades, Portfolio) have been investing and making hefty profits from this stock, makes it all the more tempting. For all the above mentioned reasons, I feel very optimistic regarding this stocks future performance.
Disclosure: Vanina Egea holds no position in any stocks mentioned.
