In this article, let's take a look at BorgWarner Inc. (BWA, Financial), a $14.28 billion market cap company that is a leading supplier of highly engineered components and systems primarily for automotive drive train applications.
Key strategies
The company continues to be innovative while taking care about costs and maximizing pricing power. BorgWarner operates in a highly competitive industry where logical cyclical demands could hurt cash flows and the sustainability of the businesses. Apart from that, the company´s fundamentals lead us to believe that profitability is achievable.
The company focuses on fuel efficiency and reducing engine emissions in order to gain market share, as well as maintaining the strategy of making investment in research to keep technology leadership.
Fuel efficiency
We think that global vehicle production will increase in the next couple of years, and that demand principally will be for more fuel-efficient vehicles.
This global trend should make BorgWarner to increase revenues. We are thinking on an average of 7% annually through 2017. This growth can increase if domestic and European demand recovers faster than we think.
Due to fuel standards, vehicles with four-cylinder engine will penetrate more rapidly, helped by the U.S. and Europe legislation.
The management expects the global turbocharger, which generates improvements in the engine efficiency, will annually grow 10% to 46 million units. That means a CAGR of more than 60% in 2018 which we consider very attractive for the company. With respect to the DCT market, it is projected to double to over 9 million units by that year.
Revenues, margins and profitability
Looking at profitability, revenue growth by 16% led earnings per share increased in the most recent quarter compared to the samequarter a year ago ($0.83 vs $0.75). During the past fiscal year, the company increased its bottom line. It earned $2.71 versus $2.08 in the prior year. This year, Wall Street expects an improvement in earnings ($3.35 versus $2.71).
Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.
| Ticker | Company | ROE (%) |
| BWA | BorgWarner | 17.53 |
| ALV | Autoliv Inc. | 12.20 |
| LEA | Lear Corp. | 14.16 |
| VC | Visteon Corp. | 35.94 |
| GNTX | Gentex Corp. | 16.79 |
| Â | Industry Median | 9.96 |
The company has a current ROE of 17.53% which is higher than the industry median. Also, it is higher than the ones exhibit by Autoliv Inc. (ALV, Financial), Lear Corp. (LEA, Financial) and Gentex Corp. (GNTX, Financial). In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So, for investors looking at those levels, Visteon Corp. (VC, Financial) could be the option. It is very important to understand this metric before investing and it is important to look at the trend in ROE over time.
Relative Valuation
In terms of valuation, the stock sells at a trailing P/E of 21.7x, trading at a premium compared to an average of 16.90x for the industry. To use another metric, its price-to-book ratio of 3.70x indicates a premium versus the industry average of 1.68x while the price-to-sales ratio of 1.80x is above the industry average of 0.68x.
As we can see in the next chart, the stock price has an upward trend in the five-year period. If you had invested $10,000 five years ago, today you could have $42,402, which represents a 33.5% compound annual growth rate (CAGR).
Final comment
Giants like Volkswagen (VOWG_p.DE), Ford (F, Financial), and the German automaker Daimler (DDAIY, Financial) were the largest customers in 2012 making more than 33% of revenue. Further, BorgWarner's revenue growth of 7% over a projected five-year period makes me feel bullish on this stock.
Hedge fund gurus like Ken Fisher (Trades, Portfolio) added this stock to their portfolios in the second quarter of 2014.
Disclosure: Omar Venerio holds no position in any stocks mentioned
