BorgWarner: We Maintain Our $81 Fair Value Estimate as Investor Day Reveals Post-Spinoff Details

We maintained our $81 fair value estimate on narrow-moat-rated BorgWarner BWA after management provided additional details post-spinoff of Phinia (fuel systems and aftermarket businesses) at its investor day. We think the market was disappointed by margin targets standalone BorgWarner set, but we had already baked this into our model. While we still need to do more work separating Phinia and BorgWarner’s financials, we believe our BorgWarner standalone fair value estimate may be between $45 and $55 while the Phinia spinoff portion could be in the neighborhood of $25 to $35. Still, the 5-star-rated shares of pre-spinoff BorgWarner on June 6 trade at a compelling 42% discount to our $81 fair value.

On a pro forma basis, BorgWarner targets revenue of around $19.0 billion in 2027, up from $14.3 billion (at the midpoint of 2023 guidance) for a 7% annual growth rate. Including management’s acquisition revenue target of $1.7 billion, 2027 revenue would be roughly $21.0 billion, growing at a 10% annual rate. Even though the company retains some traditional products like turbo chargers, eProduct booked new business supports growth. Management looks for 2025 eProduct revenue to be $5.6 billion, up from $2.5 billion (midpoint of guidance) in 2023, resulting in a nearly-50% annual growth rate. Including acquisition revenue and organic growth, management targets $10 billion in 2027 eProduct revenue for a 41% annualized growth rate.

It was no surprise to us that management targeted lower adjusted operating margin post-spinoff. Because of substantial booked new business relative to current revenue, we expected eProduct to enter 2024 at breakeven. Management targets eProduct 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 eProduct through the decade, we think a 2030 10% margin is reasonable. Long-term, we think the firm generates profitability in line with historical results.