BorgWarner Inc. - BWA stock value analysis, financials, predictions

Updated: Dec 8, 2020

Recently I bought BWA Stock (BorgWarner Inc.) along with some others so I owe analysis of the stock. Below I will put down my thinking behind this stock and why I added it to my portfolio.


Why did BWA stock pique my interest?

  • I use a few screeners: Finviz, Zacks screener, and Simply Wall Street. I stumbled across BWA stock when running one of my screener analysis as it had a low forward PE ratio of 11.

  • I wanted to take a position in electric vehicles, but TSLA or any of the Chinese players are already overpriced. However, I do think that Electric Vehicles are the future given the automotive giants are now quickly catching up with some (like VW which is BorgWarner's biggest client) planning to move all their fleet to electric in the next 5-10 years.

  • Liked their most recent investors' presentation. In the presentation, they showed their focus on cost-cutting and revenue growth due to synergies. Can be found here: https://cdn.borgwarner.com/docs/default-source/investors/investor-presentation.pdf?sfvrsn=8748cb3c_125

  • The company shares are sold at a discount. When the rest of the automotive and EV sectors were growing BWA was flat. I think it will catch up as its forward PE for the next year is under 11 while the US Auto Components industry average (35.4x).


BWA Stock Overview: company, category description


BorgWarner, Inc. engages in the provision of technology solutions for combustion, hybrid and electric vehicles. It operates through the following segments: Engine and Drivetrain. The Engine segment develops and manufactures products to improve fuel economy, reduce emissions and enhance performance. The Drivetrain segment focuses in the products that improve fuel economy, reduce emissions, and enhance performance in combustion, hybrid and electric vehicles. The company was founded in 1928 and is headquartered in Auburn Hills, MI.
Together, automakers Ford and Volkswagen account for about 25% of sales. Other customers include BMW, Daimler, and General Motors. In addition to automotive customers, BorgWarner also serves OEMs of commercial and off-highway vehicles. The company nets nearly 75% of its sales from outside the US.

Source: https://www.dnb.com/business-directory/company-profiles.borgwarner_inc.c8f048bcde6da74762577445896995c1.html


Source: https://www.tradingview.com/


BWA stock price was slowly trending down over the past 3 years. In the most recent 3 months it is going in a smaller channel near the top of the long-term channel. I usually don't use technical analysis when making a decision. Rather, I base my decisions on future value and fundamentals, but given many traders and algos trade using technicals it is always a good idea to look at recent price trends and patterns. I do think that the stock is going to break out of the channel in a bit as it is getting undervalued and there is so much buzz around automotive, electric vehicles, and green energy in general.


BWA Stock Financial overview


Source: https://simplywall.st/stocks/us/automobiles/nyse-bwa/borgwarner#future


As we can see from the chart above, BorgWarner Inc. was not doing great recently due to COVID as automakers did not sell as many cars. However, with the economy rebounding in 2021 sales for BWA are expected to recover with growing Profits and EPS.


In January 2020, BorgWarner and Delphi Technologies announced that BorgWarner will acquire Delphi for $3.3 billion to expand its ability to supply hybrid and electric vehicles.


Given VW's plans to move fully electric in the next few years and the fact that VW is BorgWarner's biggest client, this move seems a logical step.


BorgWarner Inc. Investor Presentation I referenced before specifically mentions that it expects to grow its revenues by $1.4 billion from Dephi Technologies synergies alone which will bring ~$175 million of cost synergies. This does not count organic growth.


Looking at the past performance we can see BWA was growing its sales very steadily before 2018 until 2019 when sales declined.


In 2020 alone the company sales dropped in the summer due to COVID, but they strongly rebounded in the quarter ending September.

The most interesting metric for us is leverage which represents % growth in Profit/EPS for each 1% growth in revenues. The average leverage for the past year was about 3, meaning profits grew 3% for every 1% growth in sales. How we can use this for our purposes? Let's say you expect that in the next 2 years the company is expected to grow revenues by 50%. This means it will likely grow its profit by 50% times 3 = 150%. The leverage of 3 is quite good. I believe the synergy cost savings will make sure that that leverage maintains at this level.


BWA Stock Key financial ratings/Stock Value


Now, taking into consideration the previous information let's see about the value for BWA stock.

BWA stock currently has a PE Ratio of 22.7x compared to the US Auto Components industry average (36.7x). We are not going to use the US Auto components industry average, as it is too high, and will target a more conservative PE of 20. Current PE for BWA stock accounts for a loss-making Q2 when sales declined due to COVID.

In the most recent quarter, it made $0.54 with a sharp recovery in sales. If it continues to have similar EPS, its PE at the current price is 18.4. However, analysts expect that BWA will restore its profitability to pre-COVID times when its leverage was 4-5, at that level, it will have EPS of about $4 per year meaning PE for 2021 is just 10.


Now, let's look at growth. Analysts predict that BorgWarner Inc. will achieve sales of $16.5 billion by the end of 2023. At that level of sales, they predict EPS to reach 5.375. Given the expected increase in sales of 65% vs 2019 level and using the leverage of 3, this is a bit low, but we will take it.

With the EPS of 5.375 and the current price of $40 for BWA stock, we arrive at a forward 2023 PE ratio of $40/5.375 = 7.44. If we apply a PE ratio of 20, the stock price should be around $5.375*20 = $107.5 by the beginning of 2023. This is a far target, but if you don't want to wait, EPS for the end of 2021 is expected at $3.79 (average across 8 analysts). With EPS of 20, this means BWA stock should be priced at $75 by end of 2021.



BWA Stock - Ratings by analysts


MarketWatch collects information in a neat way. It currently states there are 19 ratings for BWA stock. Nine (9) of them say buy, 9 - hold. The average target price for BWA stock is 44.82.

https://www.marketwatch.com/investing/stock/bwa/analystestimates?mod=mw_quote_tab


BWA Stock Risks


Competition is likely the key risk for BWA. Given the automotive industry is in a transition period and is rapidly changing, innovation is key. One blink of an eye and you are behind. So, it may happen that competitors steal BorgWarner's customers with innovative, better, cheaper options. Then, COVID may come back and a full recession starts. So, the stellar recovery may not happen.



Disclaimer: I own BWA stock. I do not suggest you should buy any of the stocks I write about. As usual, please do your own due diligence before investing your own money in any of the stocks I write about. The above analysis is quite basic and just gives ideas for further research. A much deeper analysis is required for each stock, including the analysis of operations, debt, etc. I may sell any of the stocks I say I currently own at any moment before it reaches the targets that I set or keep them for even when they reach the target.

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