BorgWarner Inc. BWA has been navigating through rough waters for a while now amid contracting margins, pricing pressure from OEMs and tariff-related costs. All these headwinds weighed upon BorgWarner’s results in the last reported quarter, wherein the vehicle technology company posted year-over-year lower sales and earnings. Management expects these challenges to remain and hence, it trimmed its 2019 sales and earnings view.
Consequently, the Zacks Consensus Estimate has been witnessing a downtrend. Notably, estimates for the current and next year have moved south by 27 cents and 33 cents to $3.88 and $4.16, respectively, over the past 60 days.
In the past three months, the company tumbled approximately 11%, wider than the industry’s decline of 0.7%. Let’s delve deeper into the factors ailing this Zacks Rank #4 (Sell) stock.
What’s Behind BorgWarner’s Dismal Run?
Low production volumes and margin pressures have significantly affected the firm’s performance. Declining margins across the sector and lower backlog contributions are hurting the stock. As expectations of vehicle sales continue to dwindle, hopes for a rebound look uncertain.
BorgWarner is witnessing a decline in light-vehicle production across all its major markets served, which is in turn marring the top line. In China and Europe, the industry’s light-vehicle production recorded a year-over-year decline of 16% and 7%, respectively.
Management expects the challenging conditions to continue, which will further impact its sales in the remainder of 2019. BorgWarner anticipates global light vehicles volumes to decline 3.5-5% year over year versus the prior forecast of 2.5-5%. Due to softening demand in China amid trade tensions, the company is increasingly pessimistic about the Chinese market. The firm expects production in China, Europe and North America to decline 10%, 3% and 2%, respectively, on a year-over-year basis.
Bleak outlook for the remainder of 2019 has dampened investors’ sentiments. For third-quarter 2019, the company envisions net earnings in the band of 83-90 cents per share, indicating a decline from $1 in the year-ago period. The company has also downwardly revised its sales and EPS expectations for the full year. It anticipates net sales in the range of $9.94-$10.18 billion versus the prior guidance of $9.90-$10.37 billion. EPS is also anticipated within $3.75-$4 per share compared with the previous forecast of $4-$4.25. Further, operating margin is now expected in the range of 11.4-11.8%vis a vis earlier estimate of 11.9-12.2%.
Further, supply chain inefficiencies and higher research and development costs are likely to mar its margins. In fact, the company expects R&D costs to be higher in the second half of the year as it continues to invest heavily in electrification-related programs. Reportedly, the firm is facing challenges in the turbo charging business owing to aggressive pricing strategies.
Notably, as the company has to deal with a struggling Tier 2 supplier base, margins are expected to erode. As we know, annual price reductions for OEM customers have become a common practice. While BorgWarner faces pressure from OEMs to reduce prices, it is unable to pass on any increase in raw material costs to OEM customers. While it’s normal for auto OEMs to demand price reductions from tier-1 suppliers like BorgWarner, these firms try to recover the costs from Tier-2 suppliers. However, weakness witnessed in Tier 2 suppliers is limiting BWA's ability to pass on pricing concessions to OEMs.
While the company has growth potential in new hybrid and electric vehicle models, delayed or reduced new model launches remain a concern. If the launch of the models is postponed or it generates lower volumes than expected, then the revenue mix will shift toward less favorable internal combustion engine products.
While the company has been making efforts to optimize its portfolio by entering into strategic joint venture deals and divesting non-core holdings, restructuring efforts will take time to yield results and win back investors’ confidence. Ultimately, investors would want the company’s earnings and stock price to accelerate. However, production and sales of light vehicles need to be stabilized first. However, uncertainty regarding margins and the pace of vehicles’ launch and adoption remain concerns.
Meanwhile, some better-ranked stocks in the same industry are Allison Transmission Holdings, Inc ALSN, Gentex Corporation GNTX and Oshkosh Corporation OSK, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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