Invest In This Top Innovator Before July 31

StreetAuthority Network

Although U.S. stocks began the third quarter on a down note due to worries about slowing global growth, they could soon treat investors to more record highs.

And the catalyst? Earnings season.

With many economists saying the U.S. had a very good second quarter, the number of domestic firms with sales and profits above the Street's expectations could be surprisingly high.

One firm that's likely to be among the outperformers has actually been exceeding expectations for a while. Including the first quarter of 2013, for instance, it has delivered positive earnings surprises five straight times, with beats ranging from about 4% to more than 11%.

Based on how well the company has been doing, it's a good bet to keep the streak alive when it reports second-quarter performance on July 31. What's more, the stock of leading auto parts manufacturer BorgWarner (NYSE: BWA) should remain an excellent long-term investment despite more than quadrupling during the past five years.

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If you're not familiar with BorgWarner, it's a leading innovator of auto and commercial vehicle parts designed to enhance fuel efficiency and reduce carbon emissions. The company generates 70% of revenues from such items as turbochargers, emission system components, timing chains and exhaust recirculation systems. The remaining 30% of revenue comes from transmission components for four-wheel and all-wheel-drive vehicles.

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Demand for BorgWarner's products has been very healthy, thanks to increasingly strict emission and fuel efficiency standards. As a result, revenues have almost doubled to $7.7 billion from $4 billion in 2009. Since then, earnings per share (EPS) have soared 23-fold, from $0.12 to $2.78. (Profits far outpaced sales because BorgWarner controlled operating costs, especially sales, general, and administrative (SG&A) expenses, which are only up 42% since 2009.)

BorgWarner's sales have long been climbing about 16% annually, so consensus projections for growth of 14% this year and 13% next year seem quite reasonable. Indeed, they could be conservative since the movement toward cleaner, more efficient gasoline-powered vehicles is still relatively new in the U.S. It's also gaining steam in China, the world's #1 car market and one of the most polluted countries on earth. Thus, it should offer BorgWarner prime growth opportunities for many years.

Since BorgWarner's products are mainly for gasoline and diesel engines, vehicles that run exclusively on other energy sources could seriously threaten the company's existence if it fails to evolve. However, this shouldn't be an issue for quite some time.

Consider, for instance, the findings of KPMG's Global Automotive Executive Survey for 2013, which included interviews with 200 car industry executives from all facets of the auto industry. Of this group, 85% said modification (particularly downsizing) of traditional internal combustion engines is the best way for car companies to reduce emissions and improve fuel efficiency.

More than half said it would be six to 10 years before electric cars take over, with some saying this wouldn't occur for another 11 to 20 years.

I agree with those estimating up to a two-decade transition time -- simply because change is a painfully slow process and gas prices obviously haven't risen enough to get the public clamoring for electric cars or other non-gasoline alternatives. A lot of people are still driving luxury SUVs, muscle cars and other major gas guzzlers, so fuel efficiency doesn't generally appear to be a high enough priority yet.

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In the meantime, BorgWarner should get plenty of business from its traditional product lines. Management expects turbochargers to account for as much as half of new business, with particularly strong demand from diesel and gas-powered automakers and commercial vehicle manufacturers. The market for turbochargers, which aid fuel efficiency and emissions control while maintaining vehicle performance, is projected to reach around 43 million units by 2016 from 29 million in 2011.

The company also expects strong sales of its dual clutch, a technology that enhances fuel-efficiency in cars with manual transmissions. The dual-clutch market is projected to rise to about 8 million units by 2016 from 2.7 million in 2011.

In addition to stricter emissions and fuel-efficiency standards, pent up demand for new cars should help drive sales and earnings for BorgWarner in coming years. In the U.S., people are driving around in vehicles with an average age of more than 11 years, meaning it won't be long before these vehicles have to be replaced. Many of the replacements will be new cars with BorgWarner technology.

Risks to Consider: BorgWarner has a diverse customer base including Ford (NYSE: F), Volkswagen (VLKAY) and others. However, the company is still vulnerable to downturns in the highly cyclical global automotive industry, which would need fewer BorgWarner products in times of decreased car and/or truck production. Also, the company's stock is generally riskier than the overall market. For instance, in 2008, the year of the financial crisis, shares fell more than 55% while the market dropped 37%.

Action to Take --> After increasing EPS by 39% a year for the past five years, the company is more than capable of meeting consensus projections for 17% growth during the next five years. This implies 82% upside for the stock during that time to around $122 from $67 currently.

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Although the market is looking kind of ugly right now, I wouldn't hold off long if you're interested in buying BorgWarner's stock. Come July 31, the price could be up considerably, especially if the company surprises to the upside yet again.

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