Morningstar | BWA Updated Forecasts and Estimates from 19 Nov 2018
Narrow-moat-rated BorgWarner, the provider of vehicle propulsion components and systems to the global automotive industry, reported 2018 third-quarter EPS before special items of $1.00, just a penny better than the market consensus and up $0.05 from the same period a year ago. BorgWarner continued to outperform overall light vehicle demand with 3.6% organic growth in revenue, excluding negative currency translation and the acquisition of Sevcon.On an as-reported basis, revenue increased 2.6% to $2.5 billion. Adjusted EBIT margin, excluding special items, contracted 70 basis points to 11.6% due to softer volume in China but especially Europe. Even so, we view the results as healthy profitability given the operating environment. This 4-star-rated stock is currently trading at an attractive 32% discount to our $56 fair value estimate, a compelling price relative to our estimates for revenue, cash flow, and return on invested capital.
Management confirmed guidance including revenue in a range of $10.49 billion to $10.58 billion and earnings per share before special items, or EPS, in range of $4.35 to $4.40. We estimate revenue and EPS at $10.53 billion and $4.35, respectively. Even so, our $56 fair value estimate represents a 16% premium to the sell-side $50 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, plus plateau European light-vehicle demand (despite WLTP emission certification). The strong euro relative to the U.S. dollar also provides a boost because BorgWarner derives roughly 40% of its revenue from the region.
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.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
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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