Morningstar | BorgWarner Trims 2018 Guidance, Sets 2023 Targets With 6% Annualized Organic Revenue Growth
At its annual investor day, narrow-moat-rated BorgWarner trimmed its 2018 guidance and set 2023 targets including 7% annualized revenue growth and margin expansion of roughly 90 basis points from 2017. The change in 2018 guidance included reduced revenue in a range of $10.49 billion-$10.58 billion, down from prior guidance of $10.64 billion-$10.75 billion. Earnings per share before special items, or EPS, guidance is now in a range of $4.35-$4.40, a reduction of $0.10 from previous guidance of $4.45-$4.50. The lower guidance was attributable to lower-than-expected volumes in China and Europe. Consequently, we have reduced our 2018 revenue and EPS forecasts to $10.53 billion and $4.35, respectively.We were impressed with BorgWarner's 2023 targets. Management projects revenue of $14.0 billion in 2023, equating to 6% annualized revenue growth from $9.8 billion in 2017. While management factors in declining industry volume of internal combustion engine powertrains, the company believes that it can maintain 1% annualized growth from these vehicles. Hybrid and battery electric are the primary growth drivers behind 2023 revenue growth expectations. BorgWarner's addressable market for these technologies is expected to grow by an astounding 73% annually for both hybrids and battery electrics.
We maintain that the market has undervalued BorgWarner's growth potential. Our DCF model includes growth that averages nearly 7% in the first three years of our Stage I forecast, including a favorable currency effect from a slightly stronger dollar versus the euro. However, in years four and five, we forecast revenue to be roughly flat and then decline by 3%, going into our normalized midcycle assumptions. As a result, our revenue forecast in 2022 is $11.6 billion, significantly below management's targeted growth. Despite our model assumptions, our fair value estimate is $56, representing an attractive 21% discount to the market.
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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