Company Overview: Borgwarner Inc. (NYSE: BWA) is involved in facilitating technology solutions for electric, hybrid and combustion vehicles. The company is involved in engine and drivetrain segments. The engine segment manufactures and develop products for diesel, gasoline and alternative powertrains engines. The drivestrain segment includes transmission systems and components, rotating electrical devices and AWD torque transmission components.
BWA Details
Material Business Updates
BWA Investment in Enexor BioEnergy: As announced on 23 August 2021, BWA has expanded its breadth of sustainability via investing in Enexor BioEnergy LLC, which provides carbon conversion and renewable energy solutions. The company’s modular and patented Bio-CHP™ system utilizes local organics and plastic waste to generate clean energy which can be rapidly deployed in almost any setting.
Inorganic Expansion into Flexible Circuits: As announced on 16 August 2021, BWA invested in CelLink Corporation, which develops high-conductance and large flexible circuits for energy storatge and automotive industry.
Growth Prospects Embarked in Chinese Market: As per 4 August 2021 announcement, BWA seeks or significant transaction in China mobility market, with supply contracts of dual inverters for two premier Chinese OEMs. The inverters are expected to be featured on both plug-in hybrid electric vehicles (PHEV) and hybrid electric vehicles (HEV) versions of the GWM LEMON platform.
Historical Financial Trend:
BWA illustrated sustainable historical growth while keeping the value proposition intact. The operating revenues have been growing sustainably since FY16 with consistent growth in net income until FY20 (COVID-19 Era). Operating revenues grew at a 2.9% CAGR (FY16 – FY20).
Figure 1: Historical Financial Overview
Source: Company Reports, Analysis by Kalkine Group
First Quarter FY21 Performance:
Figure 2: Quarterly Performance
Source: Company Reports, Analysis by Kalkine Group
Full-Year FY20 Performance:
Figure 3: Full-year Performance
Source: Company Reports, Analysis by Kalkine Group
Top 10 Shareholders:
The top 10 shareholders together form ~39.29% of the total shareholding. The Vanguard Group, Inc and BlackRock Institutional Trust Company, N.A. holds a maximum stake in the company at ~10.58% and ~6.19%, respectively.
Figure 4: Top 10 Shareholders
Source: Analysis by Kalkine Group
Key Metrics:
Consistent sales volume growth across most end-market sectors has translated into long-term sustainable growth levels. In addition, operating margins have remained relatively steady at an aggregate level. As a result, BWA’s profitability and return status remain stable despite recent market disruptions.
Figure 5: Key Financial Metrics
Source: Analysis by Kalkine Group
Outlook:
Automotive Industry’s Transition Phase: The automotive industry is inclining towards the development of hybrid and electric vehicles and towards advanced driver assistance technologies. Majority automotive players have sought commercial viability of fully-automated driving experience.
Management Expectations: BWA expects global industry production to incline YoY due to unwinding of COVID-19 impact. Organic growth is expected as a result of high penetration of BWA products on a global scale.
Financial Outlook: Current long-term expectations for R&D expenses remains to be in range of 5.0% - 5.5% as a proportion of net sales. For FY21, annual gross cost reductions estimated to fall in range of $40 million - $50 million.
Key Risks:
Potential for inestimated or unknown liabilities relating to the acquisition of Delphi Technologies’ businesses. In line automotive industry’s high performing factors, the OEM industry has assumed intensified competition with lower barriers to entry.
Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)
Stock Recommendation:
BWA has delivered 3-month and 6-month returns of ~-19.500% and ~-11.797%, respectively. The stock is trading above the average of the 52-week high price of US$55.55 and the 52-week low price of US$34.30. The company has been valued using the EV/Sales multiple-based illustrative relative valuation method and has arrived at a target of low double-digit (in % terms). The company might trade at a slight premium compared to its peers’ average EV/Sales (NTM trading multiple), considering high market penetration and diversified revenue stream in auto-parts. For the purpose of valuation, few peers like LCI Industries (NYSE: LCII), Standard Motor Products Inc (NYSE: SMP), Stoneridge Inc (NYSE: SRI), have been considered. Considering the growth potential in the electric vehicles, financial resilience due to product diversification, prudent liquidity position, and valuation, we give a “Buy” recommendation on the stock at the current market price of US$43.14, down by ~0.58%, as on 3 September 2021.
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BWA Daily Technical Chart (Source: REFINITIV)
Note 1: The reference data in this report has been partly sourced from REFINITIV
Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.
Technical Indicators Defined: -
Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.
Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.
Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.
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