Company Reports

BorgWarner is well positioned to capitalize on auto sector industry trends arising from global clean air regulations, consumers' demand for fuel economy, and the popularity of sport utility and crossover vehicles around the world. The company benefits from its ability to continuously innovate, a global manufacturing footprint, highly integrated long-term customer ties, high customer switching costs, and moderate pricing power from new technologies. Acquisitions of vehicle electrification companies such as Remy, Delphi Technologies, Akasol, and Santroll as well as the completed spinoff of the fuel systems and aftermarket business lines as Phinia support our thesis.

Narrow-moat BorgWarner reported fourth-quarter 2023 EPS before special items of $0.90, $0.05 lower than the $0.95 FactSet consensus and $0.04 shy of the prior year. Revenue, pro forma for the spinoff of Phinia, rose by 6% to $3.5 billion from $3.3 billion a year ago but, excluding currency, acquisitions, and discontinued operations, organic revenue rose 4%, 5 percentage points less than a 9% increase in global light-vehicle production on new business, but offset by the United Auto Workers strike and delayed electric vehicle launches. The 5-star-rated shares of BorgWarner currently trade at a compelling 56% discount to our unchanged $72 fair value estimate.

BorgWarner is well positioned to capitalize on industry trends arising from global clean air regulations, consumers' demand for fuel economy, and the popularity of sport utility and crossover vehicles around the world. The company benefits from its ability to continuously innovate, a global manufacturing footprint, highly integrated long-term customer ties, high customer switching costs, and moderate pricing power from new technologies. Acquisitions of vehicle electrification companies such as Remy, Delphi Technologies, Akasol, and Santroll as well as the completed spinoff of the fuel systems and aftermarket business lines as Phinia support our thesis.

Narrow-moat-rated BorgWarner reported third-quarter earnings per share before special items of $0.98, $0.04 better than the $0.94 FactSet consensus and $0.18 above last year. Revenue declined by 11% to $3.6 billion from $4.1 billion a year ago but, excluding currency, acquisitions, and discontinued operations, organic revenue rose 11%, 5 percentage points better than a 6% increase in global light-vehicle production, weighted to BorgWarner's customer base, on new business and customer cost recoveries.

BorgWarner is well positioned to capitalize on industry trends arising from global clean air regulations, consumers' demand for fuel economy, and the popularity of sport utility and crossover vehicles around the world. The company benefits from its ability to continuously innovate, a global manufacturing footprint, highly integrated long-term customer ties, high customer switching costs, and moderate pricing power from new technologies. Acquisitions of vehicle electrification companies such as Remy, Delphi Technologies, Akasol, and Santroll as well as the completed spinoff of the fuel systems and aftermarket business lines as Phinia support our thesis.

In 2022, battery electric vehicles represented nearly 10% of global auto sales, up from a little less than 6% in 2021. Much of the growth occurred in China, which has been a leader in EV sales over the past decade. However, with national EV subsidies in China expiring in 2022 and far lower sales in the U.S. and Europe, the market questions if EV sales can continue to grow without subsides.

Narrow-moat-rated BorgWarner reported second-quarter earnings per share before special items of $1.35, $0.30 better than the $1.05 FactSet consensus and $0.30 above last year. Revenue rose 20% to $4.5 billion from $3.8 billion a year ago, when the chip shortage was worse and above consensus by 4%. Organic revenue rose 22%, outperforming a 15% increase in global light-vehicle production weighted to BorgWarner's customer base, by 7 percentage points on new business and customer cost recoveries. We maintain our investment thesis that BorgWarner revenue increases at above-market rates due to high electrification growth.

BorgWarner is well positioned to capitalize on industry trends arising from global clean air regulations, consumers' demand for fuel economy, and the popularity of sport utility and crossover vehicles around the world. The company benefits from its ability to continuously innovate, a global manufacturing footprint, highly integrated long-term customer ties, high customer switching costs, and moderate pricing power from new technologies. Acquisitions of vehicle electrification companies such as Remy, Delphi Technologies, Akasol, and Santroll as well as the completed spinoff of the fuel systems and aftermarket business lines as Phinia support our thesis.

Narrow-moat-rated BorgWarner has completed the spinoff of Phinia, its former fuel systems and aftermarket business segments. Remaining business segments include air management, drivetrain and battery systems, and e-propulsion. Our new fair value estimate is $72 per share, down from $81 before the spinoff. The 4-star-rated shares of BorgWarner currently trade at an attractive 38% discount to our new fair value estimate.

BorgWarner is well positioned to capitalize on industry trends arising from global clean air regulations, consumers' demand for fuel economy, and the popularity of sport utility and crossover vehicles around the world. The company benefits from its ability to continuously innovate, a global manufacturing footprint, highly integrated long-term customer ties, high customer switching costs, and moderate pricing power from new technologies. Acquisitions of vehicle electrification companies such as Remy, Delphi Technologies, Akasol, and Santroll as well as the completed spinoff of the fuel systems and aftermarket business lines as Phinia support our thesis.

We maintained our $81 fair value estimate on narrow-moat-rated BorgWarner after management provided additional details post-spinoff of Phinia (fuel systems and aftermarket businesses) at its investor day. We think the market was disappointed by margin targets standalone BorgWarner set, but we had already baked this into our model. While we still need to do more work separating Phinia and BorgWarner’s financials, we believe our BorgWarner standalone fair value estimate may be between $45 and $55 while the Phinia spinoff portion could be in the neighborhood of $25 to $35. Still, the 5-star-rated shares of pre-spinoff BorgWarner on June 6 trade at a compelling 42% discount to our $81 fair value.

Narrow-moat-rated BorgWarner reported first-quarter earnings per share before special items of $1.09, just $0.01 shy of FactSet consensus and $0.04 better than last year. Revenue rose 8% to $4.2 billion from $3.9 billion a year ago when the chip shortage was worse and 1% above consensus. Excluding negative currency, divestitures, and acquisitions, organic revenue rose 12%, outperforming a 7% increase in global light-vehicle production weighted to BorgWarner's customer base, by 5 percentage points on new business and customer cost recoveries. We maintain our investment thesis that BorgWarner revenue increases at above-market rates as its products reduce emissions and support vehicle electrification.

BorgWarner is well positioned to capitalize on industry trends arising from global clean air regulations, consumers' demand for fuel economy, and the popularity of sport utility and crossover vehicles around the world. The company benefits from its ability to continuously innovate, a global manufacturing footprint, highly integrated long-term customer ties, high customer switching costs, and moderate pricing power from new technologies. Acquisitions of vehicle electrification companies such as Remy, Delphi Technologies, Akasol, and Santroll as well as the upcoming spinoff of fuel systems and aftermarket business lines support our thesis.

BorgWarner is well positioned to capitalize on industry trends arising from global clean air regulations, consumers' demand for fuel economy, and the popularity of sport utility and crossover vehicles around the world. The company benefits from its ability to continuously innovate, a global manufacturing footprint, highly integrated long-term customer ties, high customer switching costs, and moderate pricing power from new technologies. Acquisitions of vehicle electrification companies such as Remy, Delphi Technologies, Akasol, and Santroll as well as the upcoming spinoff of fuel systems and aftermarket business lines support our thesis.

BorgWarner is well positioned to capitalize on industry trends arising from global clean air regulations, consumers' demand for fuel economy, and the popularity of sport utility and crossover vehicles around the world. The company benefits from its ability to continuously innovate, a global manufacturing footprint, highly integrated long-term customer ties, high customer switching costs, and moderate pricing power from new technologies. The acquisition of Delphi Technologies on Oct. 1, 2020, supports our thesis.

Narrow-moat-rated BorgWarner reported fourth-quarter earnings per share before special items of $1.26, beating the FactSet consensus by $0.18 and $0.20 higher than last year. Revenue rose 12% to $4.1 billion from $3.7 billion a year ago when the chip shortage was still raging, beating the consensus by 5%. Excluding negative currency, divestitures, and acquisitions, organic revenue jumped 21%, outperforming a 1% increase in global light-vehicle production weighted to BorgWarner's customer base, by 20% points on new business and customer price recoveries for raw materials. We maintain our investment thesis that BorgWarner will increase revenue at above-market rates as its products reduce emissions and support vehicle electrification.

BorgWarner is well positioned to capitalize on industry trends arising from global clean air regulations, consumers' demand for fuel economy, and the popularity of sport utility and crossover vehicles around the world. The company benefits from its ability to continuously innovate, a global manufacturing footprint, highly integrated long-term customer ties, high customer switching costs, and moderate pricing power from new technologies. The acquisition of Delphi Technologies on Oct. 1, 2020, supports our thesis.

Narrow-moat-rated BorgWarner intends to spin off its fuel systems and aftermarket businesses to shareholders by the end of 2023. Management expects the spinoff to be tax-free for U.S. federal income tax purposes. The firm did not provide specifics about NewCo capitalization, only saying the spinoff would have moderate leverage and solid liquidity. Management also said NewCo would have a double-digit operating margin profile enabling “solid free cash flow.” While the spinoff is contingent on board of directors approval, U.S. Securities and Exchange Commission filing, receipt of a tax opinion, and certain regulatory approvals among others, we think the transaction will be completed. Our unchanged $78 fair value estimate reflects the combined enterprise value of BorgWarner and NewCo. While we do not have definitive information regarding the spinoff, our initial rough standalone fair values are $60-$65 for BorgWarner and $13-$18 for NewCo, assuming shareholders receive one share of NewCo for every share of BorgWarner.

BorgWarner is well positioned to capitalize on industry trends arising from global clean air regulations, consumers' demand for fuel economy, and the popularity of sport utility and crossover vehicles around the world. The company benefits from its ability to continuously innovate, a global manufacturing footprint, highly integrated long-term customer ties, high customer switching costs, and moderate pricing power from new technologies. The acquisition of Delphi Technologies on Oct. 1, 2020, supports our thesis.

Narrow-moat-rated BorgWarner reported third-quarter earnings per share before special items, or EPS, of $1.24, beating the FactSet consensus by $0.20 and $0.44 higher than last year. Revenue rose 19% to $4.1 billion from $3.4 billion a year ago when the chip shortage was at its worst. Excluding negative currency, divestitures, and acquisitions, organic revenue jumped 29%, outperforming a 22% increase in global light-vehicle production, or LVP, weighted to BorgWarner's customer base, by 7% points on new business and customer price recoveries for raw materials. We maintain our investment thesis that BorgWarner will increase revenue at above-market rates as its products reduce emissions and support vehicle electrification.