Morningstar | BorgWarner Reports Solid 2018, but 2019 Guidance Down; Maintaining $56 FVE
Narrow-moat-rated BorgWarner, a provider of vehicle propulsion components and systems to the global automotive industry, reported full-year 2018 diluted earnings per share before special items of $4.48, $0.13 better than the market consensus and up $0.59 from a year ago. BorgWarner continued to outperform overall light-vehicle demand with 4.8% organic growth in revenue, excluding negative currency translation and the acquisition of Sevcon.On an as-reported basis, full-year revenue increased 7.5% to $10.5 billion. Adjusted EBIT margin, excluding special items, contracted 10 basis points to 12.3% due to softer volume in China but especially Europe. Even so, adjusted EBIT was slightly higher, increasing to $1.296 billion versus $1.215 billion for 2017. We view the results as healthy given the operating environment. This 4-star-rated stock is currently trading at a 27% discount to our $56 fair value estimate, which in our opinion is an attractive price relative to our estimates for revenue, cash flow, and return on invested capital.
Management's 2019 guidance, including revenue of $9.9 billion-$10.4 billion and EPS of $4.00-$4.35, looked conservative to us. While we agree with management that China will be weaker in 2019, we disagree that the market will be down by 12%. We think China will most likely be down in the low single digits for the full year. We estimate revenue and EPS at $10.6 billion and $4.40, respectively. Even so, our $56 fair value estimate represents a 19% premium to the sell-side $47 consensus price target.
Our outlook for BorgWarner is unchanged based on our expectations for increasing penetration of fuel-saving technologies and powertrain electrification that enable automakers to comply with increasingly stringent clean air regulations around the world. High global demand for sport utility and crossover vehicles, for which BorgWarner products enable all-wheel and four-wheel drive, also supports growth prospects.
Our growth thesis is supported by the company's net new business backlog, representing incremental revenue of $2.0 billion to $2.4 billion through 2021. Management said that 70% of the backlog is attributable to hybrid powertrain, while 10% came from battery electric vehicle programs. Because of government incentives for new energy vehicles, China represents 50% of BorgWarner's backlog.
BorgWarner is a holding company. Through its subsidiaries, the company is a global product provider in technology solutions for combustion, hybrid and electric vehicles. The company manufactures and sells these products worldwide, primarily to original equipment manufacturers of light vehicles (passenger cars, sport-utility vehicles, vans and light trucks). The company's segments are: Engine, which provides turbochargers, eBoosters, timing systems, emissions systems, thermal systems, gasoline ignition technology, cabin heaters, battery heaters and battery charging; and Drivetrain, which provides rotating electrical components, power electronics, clutching systems, control modules and all-wheel drive systems.
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