Morningstar | BorgWarner's 1Q Results Down, but Firm Beats Global Auto Production; Maintaining $57 FVE
Narrow-moat-rated BorgWarner, the provider of vehicle propulsion components and systems to the global automotive industry, reported first-quarter 2019 diluted earnings per share before special items of $1.00, $0.06 better than the market consensus but down $0.10 from a year ago. BorgWarner continued to outperform overall light-vehicle demand, with a 3.3% organic revenue decline versus a 5.2% drop in global light-vehicle production.On an as-reported basis, including negative currency translation, revenue dropped 7.8% to $2.6 billion. Adjusted EBIT margin, excluding special items, contracted 70 basis points to 11.5% due to softer global volume, higher tariffs, bankruptcy of some Europe suppliers, and a pull-forward in development costs into the first half of 2019 for the timing of some new business launches. Consequently, adjusted EBIT declined 12.8% to $295.0 million versus $338.4 million for the first quarter of 2018. We view the results as healthy, given the operating environment. This 4-star-rated stock is currently trading at a 27% discount to our $57 fair value estimate, an attractive price relative to our estimates for revenue, cash flow, and return on invested capital.
Management confirmed full-year 2019 guidance despite beating its own first-quarter expectations on both the top and bottom lines, saying that it was too early in the year to change full-year guidance because of the degree of uncertainties in the operating environment. The company's guidance for revenue of $9.9 billion to $10.4 billion and EPS of $4.00 to $4.35 looks 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 $10.3 billion and $4.20, respectively. Even so, our $57 fair value estimate represents a 19% premium to the sell-side $48 consensus price target.
Our outlook for the shares of BorgWarner remains 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% comes 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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Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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