BorgWarner Earnings: Solid Revenue Growth, but Currency and Acquisitions Ding Margin

Narrow-moat-rated BorgWarner BWA 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.

Adjusted EBIT was $396 million with a margin of 9.5%, versus $389 million and a 10.0% margin reported last year. Excluding $18 million in currency effect and a $7 million acquisition impact, adjusted EBIT would have been $421 million with a 10.1% margin. Continued but fewer customer call-offs from the chip shortage, inflationary cost pressures, and increased R&D for electrification ramp-up also dragged margin.

Management tweaked 2023 revenue guidance to $17.1 billion-$17.9 billion from $16.7 billion-$17.5 billion on currency effect, but organic revenue growth remains unchanged at 7%-12%. Adjusted EBIT margin of 10.0%-10.4% was unchanged but due to increased revenue, the EPS guide is now $4.60-$5.15, up from $4.50-$5.00. The firm said that the fuel systems and aftermarket spinoff may happen as soon as the end of the third quarter versus end of year previously. We will have a stand-alone BorgWarner fair value estimate once more spinoff details become available. We adjusted our 2023 estimates, but we still aim for the low end of management guidance due to industry uncertainties remaining throughout the year. The 5-star-rated shares of BorgWarner currently trade at an attractive 47% discount to our new $81 fair value estimate, which is up $1 for the time value of money.