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Why BorgWarner Stock Gained 18% in January

John Ballard, The Motley Fool

What happened

Shares of BorgWarner (NYSE: BWA) gained 17.8% in value last month, according to data provided by S&P Global Market Intelligence. The stock price stumbled toward the end of 2018 along with the broader market, but found its footing as most stocks began to rebound at the start of 2019. 

Additionally, BorgWarner made a few announcements in January, including the sale of its thermostat business to privately held U.K. company Arlington Industries Group, and the introduction of its integrated electric drive module (iDM) product family of propulsion solutions for hybrid and electric vehicles.  

The underside of a car revealing the transmission and engine.

IMAGE SOURCE: GETTY IMAGES.

So What

As a growing share of consumer demand shifts from cars powered by combustion engines to ones with hybrid and all-electric motors, BorgWarner is shifting its capital allocation accordingly. Management forecasts the addressable market for combustion engines will stall over the next five years, while demand for hybrid and electric vehicles will explode.

The sale of the thermostat business is consistent with Borg's strategy to shed non-core assets so it can focus more on the growth opportunity in propulsion technologies. 

Now what

The iDM combines state-of-the-art transmission technology, an electric drive motor, and the power electronics into one unit. "Our comprehensive portfolio makes us a product leader in clean technology solutions and a strong partner for automakers worldwide as they move toward a cleaner and more environmentally friendly future," said Stefan Demmerle, president and general manager of BorgWarner's PowerDrive Systems. 

The growing adoption of cleaner transportation solutions has been fueling BorgWarner's growth for many years, and that should continue. Management expects revenue wll grow at a compound annual rate of about 6% between now and 2023, when it should hit $14 billion, and they expect free cash flow to nearly double to $1 billion by that year. The stock currently trades at a forward price-to-earnings ratio of 9. 

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John Ballard has no position in any of the stocks mentioned. The Motley Fool recommends BorgWarner. The Motley Fool has a disclosure policy.