On Jan 29, we maintained our Neutral recommendation on BorgWarner Inc. (BWA) based on an improvement in the bottom line in the third quarter of 2013 and benefits from the acquisition of Gustav Wahler. However, pricing pressure from original equipment manufacturers (OEMs) and strong competition could adversely impact the company’s results.
Why the Reiteration?
On Oct 30, 2013, BorgWarner posted a 17.7% increase in adjusted earnings to $1.40 per share in the third quarter of 2013 compared with $1.19 in the third quarter of 2012. Earning per share outpaced the Zacks Consensus Estimate by 6 cents.
Revenues increased 6.6% year on year to $1.81 billion, but missed the Zacks Consensus Estimate of $1.84 billion. Revenues benefited from a favorable impact of the euro, partially offset by an unfavorable impact of Japanese yen.
BorgWarner expects annual sales to improve 3%–4% year over year in 2013. BorgWarner expects net earnings (excluding non-comparable items) of $2.78–$2.83 a share in 2013. The Zacks Consensus Estimate of $2.81 lies within this guidance range.
For 2014, BorgWarner projects a 12%–15% rise in earnings per share to $3.10–$3.25, compared with the Zacks Consensus Estimate of $3.24. Organic sales are expected to grow 7%–11% from the 2013 sales guidance, based on rising demand for product technologies that improve fuel efficiency and emissions performance.
Additionally, BorgWarner will benefit from the acquisition of Gustav Wahler GmbH u. Co. KG and its general partner. The takeover is expected to culminate in the first quarter of 2014. The buyout is likely to fortify BorgWarner’s position as a producer of complete exhaust gas recirculation (:EGR) systems and is also expected to enhance market opportunities in passenger and commercial vehicle application.
However, BorgWarner faces intense pressure from OEMs to reduce price. It is unable to pass on the increase in raw material costs to its OEM customers. In addition, the company faces tough competition as many of its competitors enjoy advantages such as lower labor and health care costs, lower tax rates and sometimes subsidies related to export and raw materials.
Other Stocks That Warrant a Look
BorgWarner carries a Zacks Rank #3 (Hold).
Better-ranked stocks in the industry in which BorgWarner operates include Gentex Corp. (GNTX), STRATTEC Security Corporation (STRT) and Meritor, Inc. (MTOR). STRATTEC and Gentex carry a Zacks Rank #1 (Strong Buy), while Meritor has a Zacks Rank #2 (Buy).
Read the Full Research Report on GNTX
Read the Full Research Report on STRT
Read the Full Research Report on MTOR
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