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BorgWarner (BWA) Down 23.9% Since Last Earnings Report: Can It Rebound?

Zacks Equity Research

A month has gone by since the last earnings report for BorgWarner (BWA). Shares have lost about 23.9% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is BorgWarner due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

BorgWarner’s Q2 Earnings Meet, Revenues Top Estimates

BorgWarner Inc. has delivered adjusted earnings of $1 per share in second-quarter 2019, which is in line with the Zacks Consensus Estimate. However, the figure fell from $1.18 recorded in the year-ago quarter. Net income amounted to $172 million ($0.83 per share) compared with $272 million ($1.3 per share) in the prior-year quarter.

BorgWarner’s net sales declined 5.3% year over year to $2.55 billion, which beat the Zacks Consensus Estimate of $2.53 billion. Net sales fell nearly $140 million, owing to foreign currency fluctuations.

In the reported quarter, operating income amounted to $285 million compared with the prior-year quarter’s figure of $313 million.

Net sales in the Engine segment fell to $1.57 billion from $1.67 billion in the prior-year quarter. Excluding impacts of foreign currencies and the divestiture of the thermostat product line, net sales inched down 0.4% year over year and adjusted EBIT (earnings before interest, income taxes and non-controlling interest) declined 6.9% to $258 million.

In the Drivetrain segment, net sales declined to $998 million from $1.03 billion in the prior-year quarter. Excluding impacts of foreign currencies, net sales inched up 0.2% on a year-over-year basis and adjusted EBIT fell 8.6% to $106 million.

Financial Position

As of Jun 30, 2019, BorgWarner had $710 million in cash compared with $739 million as of Dec 31, 2018. Long-term debt was $1.93 billion, down from $1.94 billion recorded at the end of 2018.

Net cash provided by operating activities was $467 million as of Jun 30 compared with $305 million as of Jun 30, 2018. Investment in capital expenditure, including tooling outlays, declined to $244 million from $269 million recorded as of Jun 30, 2018.

Outlook

For third-quarter 2019, the company’s net organic sales are likely to be down 1.5% to up 1.5% from net sales of $2.48 billion in the year-ago quarter. Further, it envisions net earnings between 83 cents and 90 cents per share.

For 2019, BorgWarner reaffirmed its guidance. It anticipates net sales in the range of $9.94-$10.18 billion and net earnings in the band of $3.75-$4 per share. Further, operating margin is expected in the range of 11.4-11.8%.
 

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended downward during the past month. The consensus estimate has shifted -15.2% due to these changes.

VGM Scores

At this time, BorgWarner has a nice Growth Score of B, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise BorgWarner has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.



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