On Sep 26, 2013, we maintained our Neutral recommendation on BorgWarner Inc. (BWA). We appreciate the company’s improved performance in the second quarter of 2013. BorgWarner will benefit from the rise in demand of fuel-efficient powertrain solutions in Brazil and exhaust gas recirculation products for passenger cars and commercial diesel vehicles. However, we are concerned about the pricing pressures from OEMs and strong competition prevailing in the market.
Why the Reiteration?
On Jul 25, BorgWarner posted a 10.3% increase in adjusted earnings to $1.50 per share in the second quarter of 2013 compared with $1.36 in the second quarter of 2012. Earnings per share surpassed the Zacks Consensus Estimate by 9 cents.
Revenues increased 2% to $1.89 billion, but missed the Zacks Consensus Estimate of $1.92 billion. The improvement in revenues was driven by a 3% increase in Global light vehicle production. Light vehicle production in Europe increased 1% year over year.
Following the release of the second-quarter results, the Zacks Consensus Estimate for fiscal 2013 increased marginally by 0.2% to $5.51 per share. However, the Zacks Consensus Estimate for fiscal 2014 declined 0.3% to $6.44 per share.
BorgWarner will benefit from the rise in demand for fuel-efficient powertrain solutions in Brazil and its leading position as a supplier of eco-friendly technologies. The company is expanding its technological leadership in engine and drivetrain components in Brazil. It is setting up a new 215,200-square-foot production facility and engineering center in Brazil, which will help car manufacturers to comply with the new regulations under the INOVAR-AUTO program. In addition, the company is also expanding in Portugal.
BorgWarner anticipates that annual sales will improve between 3% and 5% in 2013. The company expects global production volumes to be up approximately 2% in 2013. The increase is primarily driven by a 5% and 10% increase in production in North America and China, respectively. The company also increased its net earnings expectation for the year to $5.40–$5.55 from the prior estimate of $5.15–$5.45 per share.
However, we are concerned about risk associated with customer concentration. Its major customers like Volkswagen AG (VLKAY) and Ford Motor Co. (F) accounted for about 17% and 13%, respectively, of total sales in 2012. Thus, a loss of any of these major clients can significantly reduce the company’s earnings. In addition, innovative technologies from peers mar demand of BorgWarner’s products; thus adversely affecting the results of the company.
Other Stocks to Look For
American Axle & Manufacturing Holdings Inc. (AXL), a Zacks Rank #1 (Strong Buy) stock, is currently performing well in the original auto and truck industry.
Currently, BorgWarner retains a Zacks Rank #2 (Buy).