BorgWarner Earnings: Solid Revenue Growth and Margin Expansion as Chip Shortage Alleviates

Narrow-moat-rated BorgWarner BWA 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.

Adjusted EBIT was $474 million with a margin of 10.5%, versus $348 million and a 9.3% margin reported last year. Excluding Phinia, which was spun off to shareholders at the beginning of July, pro forma adjusted EBIT would have been $369 million with a 10.1% margin, up from pro forma $258 million and an 8.5% margin in the prior year. Volume leverage was partially offset by continued customer slowdowns from the chip shortage, inflationary cost pressures, and increased R&D for electrification ramp-up.

Management tweaked 2023 guidance includes pro forma full-year revenue of $14.2 billion-$14.6 billion, raising the low-end from $14.0 billion, and unchanged adjusted operating margin of 9.2%-9.6%. Despite management’s raised global light vehicle production assumption by 750,000 units at the midpoint, revenue guidance at the top-end was unchanged due to a $200 million reduction at the top end of forecast ePropulsion revenue to $2.4 billion from $2.6 billion. The low end remained at $2.2 billion. We had already modeled 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. The 4-star-rated shares of BorgWarner currently trade at an attractive 40% discount to our $72 fair value estimate.