BorgWarner: After Completion of Phinia Spinoff, We Lower Our Fair Value Estimate to $72

Narrow-moat-rated BorgWarner BWA 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.

Pro forma for the spinoff of Phinia as if it occurred at the beginning of 2023, management expects full-year revenue of $14.0 billion-$14.6 billion and adjusted operating margin of 9.2%-9.6%. We model at the low end of management’s guidance due to industry headwinds including the microchip shortage, the Ukraine war, inflationary cost pressures, rising interest rates, and the possibility of a recession in major auto markets. On an as-reported basis, we estimate 2023 revenue of $15.4 billion and adjusted operating margin of 9.2%.

Our model assumes 6% annualized revenue growth using 2019 as a base year, pro forma for the Phinia spinoff and the acquisition of Delphi in 2021. Over the past 15 years, the company has generated adjusted operating margin as high as 12.7% (2015) and as low as 2.6% (2009) with an 11.9% median. Because of substantial booked new business relative to current revenue, we assume lower margin than historical ranges with an average of 9.4% during our stage one forecast and a 9.0% normalized midcycle margin in year five. Management targets e-product margin to reach 7% in 2027 and 10% in 2030. While the targets are below BorgWarner’s 11.9% 15-year historical median, because of substantial growth in e-product through the decade, we think a 2030 10% margin is reasonable. Long term, we think the firm will generate profitability in line with historical results.