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Why Shares of BorgWarner Soared in June

Lee Samaha, The Motley Fool

What happened

Shares of automotive technology company BorgWarner (NYSE: BWA) rose 18.3% in June according to data provided by S&P Global Market Intelligence. The move marks recovery from the 15% decline in May, and somehow the stock is actually up 17.2% year to date -- just slightly behind the gain in the S&P 500.

It's no mean feat considering that the automotive market has been weak in 2019, with a number of automotive-related companies lowering full-year guidance on first-quarter earnings calls in response to disappointing end market conditions. Interestingly, BorgWarner was not one of them, and the company's mix of engine and drivetrain technology has helped it to continue outperforming its end markets.

An automotive production line.

Image source: Getty Images.

That said, outperformance doesn't mean sales growth will be positive in 2019, and the midpoint of management's full-year organic sales growth guidance implies a slight decline. So what changed in June? The answer is simply that the market took a more optimistic view of economic growth prospects in general and the automotive market in particular.

So what

History suggests that automotive markets are cyclical and respond to the interest rate cycle and long-term trends in employment and incomes. All three of those factors have been positive in 2019 in the U.S., but question marks remain over the Chinese automotive market -- the latest figures show that China's vehicle sales declined 16.4% in May, marking the 11th consecutive month of declines.

With the near-term outlook uncertain, BorgWarner's management has decided to be proactive and set a plan in motion to cut annual structural costs by some $40 million to $50 million and use the savings to increase R & D spending in order to develop new products and take full advantage of growth in hybrid and electric vehicles. The bad news is that the restructuring will result in $80 million to $100 million in expenses through until the end of 2020.

All told, don't be surprised if there's near-term pressure on BorgWarner's earnings growth, but the company's bold moves to improve long-term product development deserve applause.

Now what

In the near term, investors should brace themselves for the upcoming second-quarter earnings as tariff and some supplier bankruptcy costs are likely to hit the bottom line, as will an increase in R&D expenses. That said, the key question will be whether management maintains its full-year guidance.

Meanwhile, investors will be hoping BorgWarner can continue to demonstrate an ability to outperform some difficult end markets.

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