BorgWarner Underappreciated by Market

Narrow-moat rated

Over the past several months, we have been telling investors about how BorgWarner benefits from expanding penetration of fuel saving, emissions reducing technologies that enable automakers to comply with increasingly more stringent clean air regulations as well as a recovery in European demand--a substantial regional market for BorgWarner. Since we highlighted BorgWarner stock in our January 2016 Select Report, “A Diesel Dilemma: Is the Demise of the Diesel Imminent or Exaggerated?” the share price has appreciated approximately 25%.

However, we believe the stock market still does not reflect the firm's growth and margin prospects. Management guidance points to a long-term revenue growth rate in the mid- to high-single-digits, and excluding the costs and effects of acquisition integration, the company also expects margin expansion from already impressive levels. In 2015, BorgWarner EBITDA margin was a very healthy 17.2% even though European auto demand (the region accounted for 54% of 2015 revenue) has been in recovery but still at historically lower levels. This 4-star rated stock currently trades at slightly more than a 30% discount to our $52 fair value estimate.

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