BorgWarner Earnings: Solid Results but Uncertainty Over Electric Vehicle Outlook Hits Stock Price

Narrow-moat-rated BorgWarner BWA 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.

Adjusted EBIT was $349 million with a margin of 9.6%, versus $305 million and a 9.5% margin reported last year. Volume leverage was partially offset by the UAW strike, supply chain disruption, inflationary cost pressures, and increased R&D for electrification ramp-up.

Even so, management said that, due to some customers’ delays in EV programs and reduced output of some EV models, the firm pushed back EV-related revenue targets through 2025 but maintained the 2027 target. As a result, BorgWarner stock traded 13% lower. In 2023, EV-related revenue is expected to be around $2.1 billion versus $2.4 billion previously. For 2025, management lowered targeted EV revenue to $4.5 billion-$5.0 billion from about $5.6 billion. In 2027, the EV revenue targeted is more than $10 billion. Management said that EV product quoting activity remains strong.

Management tweaked 2023 guidance slightly lower but we had already modeled at the low end of prior guidance. Our unchanged 2023 estimated revenue excluding discontinued operations is $14.2 billion, the midpoint of $14.1 billion-$14.3 billion guidance and we assume a 9.4% adjusted EBIT margin, at the low end of 9.4%-9.6% guidance. Out of an abundance of caution, we lightened our Stage I revenue growth assumption to 5% from 6%, resulting in a $3 offset to a $3 time of value of money increase in our fair value. The 5-star-rated shares of BorgWarner currently trade at a compelling 55% discount to our unchanged $72 fair value estimate.