Morningstar | BWA Updated Forecasts and Estimates from 27 Aug 2018
Narrow-moat-rated BorgWarner, the provider of engine and drivetrain components and systems to the global automotive industry, reported 2018 second-quarter EPS before special items of $1.18, $0.08 ahead of market consensus and up $0.22, or 23%, from the same period a year ago. In our opinion, the outperformance was mainly attributable to the strong euro relative to the U.S. dollar, which added $0.05 per share during the quarter.On an as-reported basis, revenue increased 13% to $2.7 billion, but excluding M&A activity and favorable currency impact, the organic growth would have been a very solid 7%. Adjusted EBIT margin, excluding special items, expanded 20 basis points to 12.7% but increased 14% on an absolute basis to $341 million. This 4-star-rated stock is currently trading at a 21% discount to our $56 fair value estimate, attractively priced relative to our estimates for revenue, cash flow, and return on invested capital.
Management tweaked revenue and adjusted EBIT guidance slightly higher, changing their currency assumption to $1.15/EUR 1 in the second half of 2018 from $1.18/EUR 1. This resulted in an increase to EPS guidance by $0.125 (at the midpoint) to a range of $4.45-$4.50. However, we estimate 2018 EPS at $4.50, at the high end of management guidance. Even so, our $56 fair value estimate represents a slight discount to the sell-side $58 consensus price target. We think BorgWarner may once again enjoy being a Wall Street darling.
Our outlook for the shares of 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. Plus, plateau European light-vehicle demand and the strong euro relative to the U.S. dollar provides a boost because BorgWarner derives roughly half 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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