BorgWarner Making More Progress Than The Share Price Shows

This has been a tougher-than-expected year for auto suppliers, as component availability (particularly semiconductors) has continued to impact production schedules, leading to lower-than-expected volumes and margin headwinds from inefficient production schedules, compounded by ongoing inflationary pressures on inputs. Despite those challenges, BorgWarner (NYSE:BWA) has done better than many peers relative to expectations, and management has kept the company on track with respect to building out its capabilities in electrification.

BorgWarner shares have lost about 5% of their value since my last update, a disappointing result, though still better than the S&P 500 and better than many peers/rivals like Faurecia (OTCPK:FURCF), Valeo (OTCPK:VLEEY), Aptiv (APTV), Lear (LEA), and Dana (DAN), though trailing American Axle (AXL) and Vitesco (OTCPK:VTSCY). While I do still believe that BorgWarner is meaningfully undervalued, a weaker consumer spending backdrop for 2023 isn't helping near-term sentiment, and significant ongoing questions remain about the long-term market share and profitability of BorgWarner's EV-based businesses.

 

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BorgWarner Making More Progress Than The Share Price Shows

BorgWarner: Current Conditions Remain Challenging, But EV Business Is Ahead Of Plan

 

The shares of BorgWarner (BWA) have underperformed since my last update, trailing the S&P 500 by about 15%, but not performing too badly next to the wider auto supplier sector. The main issues are familiar ones to most readers – weak underlying light vehicle production on component shortages and margin pressures from both supply chain issues and the ongoing cost of developing new EV system components.

BorgWarner’s initial guidance for FY’22 was soft relative to the Street, but I believe management is taking a prudently cautious approach to initial guidance given the ongoing supply shortages and the lack of visibility on supply improvements. At the same time, the company has been building a good track record – beating quarterly expectations and already ahead of the company’s prior 2025 EV revenue target.

I continue to believe that BorgWarner is well-positioned to be one of the top suppliers of EV components in 2025 and beyond. With mid-single-digit revenue growth and mid-single-digit FCF margins on the way, I believe BorgWarner is meaningfully undervalued today and worth consideration ahead of a pickup in auto builds.

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BorgWarner: Current Conditions Remain Challenging, But EV Business Is Ahead Of Plan

BorgWarner's Recent Analyst Day Laid Out Clear Targets, But Settled Nothing

 

BorgWarner (NYSE:BWA) has been a battleground stock recently, and the company’s investor day last week changed basically nothing. BorgWarner bulls still believe (broadly speaking, of course) that the OEM insourcing is a manageable threat and that the company has assembled a compelling xEV portfolio. Bears still believe that insourcing will be a huge negative influence and that BorgWarner is doomed to a future with little revenue growth and weaker margins.

As an owner of BorgWarner shares, it’s pretty obvious which camp I’m in, though I wouldn’t consider myself a raging bull – there are very real threats that BorgWarner is facing, not to mention major modeling unknowns, and the company’s R&D and M&A plans run the risk of setting fire to significant amounts of shareholder capital.

I’ve chosen to take a more conservative outlook for the next five years, largely on elevated R&D spending and the risk of M&A swap-outs of higher-margin legacy ICE components for lower-margin (initially) xEV components, but my 2030 assumptions change by only a couple of percentage points, and I still believe these shares offer double-digit near-term upside and above-average long-term upside as well.

 

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BorgWarner's Recent Analyst Day Laid Out Clear Targets, But Settled Nothing

BorgWarner Still A Battleground For The Future Of Auto Suppliers

There are two pretty distinct camps where BorgWarner (NYSE:BWA) is concerned. Bears argue that the company will be unable to replicate its dominance in combustion engine powertrains in the coming EV world, and that the company will see OEM in-sourcing limit its opportunities to offset declines in its conventional business.

Bulls argue that, yes, while there will be some in-sourcing, very few OEMs will be able to insource all of their needs, and many of those that try will ultimately run into problems turn to quality suppliers like BorgWarner. And in the meantime, BorgWarner can continue to generate attractive cash flows from legacy combustion powertrains and hybrids. I’ve long been in that second group, and even after a one-third move up in the share price since my last article (a middle-of-the-pack performance), I’m still bullish on these shares. BorgWarner will need to put forth a convincing case at its March 23 Investor Day to swap skeptics, but I believe the valuation here is still attractive relative to the long-term opportunities.

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BorgWarner Still A Battleground For The Future Of Auto Suppliers

BorgWarner's Long-Term Appeal Remains Intact Despite Growing Near-Term Concerns

Between internal combustion engines, hybrids, and all-electric vehicles, BorgWarner (NYSE:BWA) has an attractive and comprehensive portfolio of solutions, and I expect BorgWarner to remain one of the key suppliers to the industry through this extended transition period. There are certainly short-term risks from COVID-19 and longer-term risks tied to uncertainties in how much OEMs will in-source (and the margins they will be willing to allow to suppliers), but I remain of the opinion that BorgWarner will maintain strong content growth, allowing the company to outgrow underlying production volumes across the next decade.

When I last wrote about BorgWarner, I had some concerns that the rally might have gone a little too far too fast, and the shares have since pulled back about 15%. I've taken advantage of this pullback to add shares in my own account, and I believe the shares are once again priced to offer an attractive double-digit long-term total annualized return. I don't ignore or dismiss the above-average risks here, but I believe the current price undervalues the quality of the company and its ability to leverage not only hybrid/EV content growth, but also growth from more conventional powertrains that will still be in production for some time.

 

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BorgWarner's Long-Term Appeal Remains Intact Despite Growing Near-Term Concerns

BorgWarner Looks Undervalued As A Post-Panic Recovery Play

BorgWarner (BWA) shares have already recouped some of the panic-selling declines, but the shares continue to trade well below what I believe to be a fair long-term assessment of the company’s value, with or without the Delphi (DLPH) deal. The process of getting auto production back on its feet will be a challenge, as will the conversion/evolution toward electric powertrains, but I believe it’s a challenge that BorgWarner is up for, and I believe buying today offers attractive long-term value.

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BorgWarner Looks Undervalued As A Post-Panic Recovery Play

BorgWarner Makes A Bold M&A Move

I didn’t see this one coming.

Yes, I thought, and wrote, that the auto supplier industry was likely to see consolidation, particularly in areas like internal combustion engine (or ICE) components, where pressures from eventual hybrid/electric adoption and R&D were going to reward scale. I likewise thought there’d eventually be consolidation in hybrid/EV-related components, as companies who waited too long to move (or made the wrong moves) tried to correct.

Still, while it makes a great deal of sense to me, I didn’t expect BorgWarner (BWA) to pony up and acquire Delphi (DLPH). Part of the reason was that I expected a negative reaction from investors, and that’s exactly what BorgWarner shares saw after the deal, but also because BorgWarner management had been pretty adamant that they had what they needed in terms of hybrid/EV positioning.

I like this deal. I like the synergy in combustion powertrain, and I like the synergy in hybrid/electric, where Delphi’s power electronics business (inverters in particular) meaningfully improves BorgWarner’s leverage to BEVs. The market clearly doesn’t like the deal, and while there will be plenty of execution challenges and risks, I’d buy BorgWarner on this weakness.

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BorgWarner Makes A Bold M&A Move

A Beat-And-Raise Has Shifted Sentiment On BorgWarner

I liked BorgWarner (BWA) back in late August and thought sentiment was much too negative on this balanced play on internal combustion and electric powertrains, but I didn’t expect the roughly 35% snap back in the share price in such a short time. That’s Wall Street in a nutshell, though, as a share price that’s driven to unreasonably low levels on little more than fear can quickly rebound when sentiment shifts.

Although the valuation isn’t so deep in what I consider to be a “can’t miss” range, I do still think BorgWarner shares are undervalued, and I do still believe that this company is one of the best-placed plays on increasing efficiency and emissions standards, as well as the eventual migration to hybrid and EV models. A greater focus on its manufacturing costs would be welcome, and I’d note that there’s still risk to the backlog, but this is still a name to consider even after this run.

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A Beat-And-Raise Has Shifted Sentiment On BorgWarner

BorgWarner Hammered On Near-Term Pressures And Longer-Term Doubts

Although I did see some risk to BorgWarner (BWA) from "lower for longer" weakness in the global auto market, the 20% decline since my last update seems like a somewhat extreme reaction to what was already known to be a tough operating environment. On the other hand, this is another example of how the difference between longer-term DCF-based valuation and shorter-term earnings-based valuation approaches can toss stocks around, particularly in uncertain and fearful markets.

I don't see much that has changed in BorgWarner's long-term outlook, though I will once again repeat my concern/caveat about uncertainties on the margins for future hybrid/EV wins and the pace of new vehicle launches and adoption. Although I expect the second half of 2019 will be rough, and likely 2020 too, I still like the long-term story and BorgWarner's long-term opportunity in vehicle electrification, and I think this is a good time for more patient investors with a longer horizon to do their due diligence.

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BorgWarner Hammered On Near-Term Pressures And Longer-Term Doubts

Tenneco Pounded Down On Weak Execution, High Leverage

I wasn’t all that fond of Tenneco (TEN) when I last wrote about it in the fall of 2018, but even though I had issues with the company’s unimpressive operating performance and weak leverage to vehicle electrification, I didn’t expect the 75% drop in the share price that followed. Management credibility is arguably at an all-time low now, and with weak trends in light vehicle builds and a weakening outlook for many commercial vehicles, Tenneco’s back-end-loaded second half guidance seems perhaps ambitious even with a meaningful revision after first quarter earnings.

It’s tough to reconcile the magnitude of the share price drop with the actual underlying performance (unimpressive as it has been), but net debt is now close to 3.5x expected EBITDA and the spin-out of DRiV has been postponed by at least six months. I can understand why deep-value/contrarian investors may want to give this a look (especially as I think auto/vehicle parts stocks are undervalued as a sector), but I’m concerned about the company’s long-term competitiveness and the fact that net debt now exceeds over a decade of estimated free cash flow in my model.

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Tenneco Pounded Down On Weak Execution, High Leverage

Dana Caught Up In Several Cross-Currents

I was puzzled by Dana’s (DAN) valuation back in October, thinking that the shares looked undervalued even factoring in a weaker near-term outlook for light vehicles and an eventual end to the heavy truck boom. Lending some support to my notion that stocks don’t move up just because they’re cheap, the shares are more or less in the same place now (down about 5%), albeit with a steep drop into the close of 2018 and a rally in the interim.

Now Dana is in the middle of that light vehicle slowdown, and heavy trucks in North America are enjoying an extended peak, but orders have been plunging. Meanwhile, heavy off-road machinery has been looking a little wobbly lately. So even though Dana has built up a strong electrification portfolio that management believes will help drive revenue to over $10 billion in 2023, nobody seems to believe that today. With the shares undervalued even at lower long-term growth rates, valuation remains a head-scratcher and I’m increasingly tempted to take a flyer on this name.

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Dana Caught Up In Several Cross-Currents

Valeo's Outperformance Relative To Underlying Volume May Be The Start Of The Turn

I can understand why sell-side analysts would see light at the end of the tunnel at Valeo (OTCPK:VLEEY) (FR.PA) and assume it’s an oncoming train. That’s what happens when you miss guidance for two and a half years, offer vague and unconvincing explanations of those misses, and generally make any bulls look foolish. And yet, the markets tend to have short memories if and when companies turn around their performances, so maybe, finally, my bullish thesis on Valeo doesn’t feel so foolish.

I’m not changing any of my core assumptions in any meaningful way, as there’s still a lot of “show me” to this story. Still, 5% revenue growth for a company with a strong hybrid/EV order book (if they can deliver…) and strong FCF growth (if they can deliver…) doesn’t seem out of line, and would support a meaningfully higher share price from here, even after a recent rally that has seen the stock outperform peers/rivals like BorgWarner (BWA), Continental (OTCPK:CTTAY), and Schaeffler (OTC:SFFLY).

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Valeo's Outperformance Relative To Underlying Volume May Be The Start Of The Turn

Look Past The Current Auto Weakness, And BorgWarner Has Investment Appeal

These aren’t great times for the auto sector, with U.S. auto sales down more than 5% in April, European registrations down 4% in March, and Chinese auto sales down 11% in the first quart of 2019. Against that backdrop, it’s not really surprising that BorgWarner (BWA) is seeing revenue and margin contraction.

Looking out further, though, BorgWarner’s backlog suggests that the company’s leverage to hybrids and EVs is increasing as expected, and while there is still uncertainty as to what the margins on that business will look like, I believe today’s price discounts an excessively pessimistic view. The numbers probably won’t start looking better for BorgWarner until the second half of 2019, and there is still some risk there, but I think longer-term investors may want to dig in and do their due diligence on this underrated powertrain player.

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Look Past The Current Auto Weakness, And BorgWarner Has Investment Appeal

With Or Without Federal Mogul, The Street Just Doesn't Care About Tenneco Now

If you wrote up a list of outperforming auto and commercial vehicle component stocks, it would look for all intents and purposes like you were writing in invisible ink. A few companies like Aptiv (APTV) and Magna (MGA) have been less-bad than average, and Allison (ALSN) and tiny Commercial Vehicle Group (CVGI) are up strongly over the past year, but for the most part, this has been a pretty awful sector as investors have written off the passenger vehicle market for the near term, priced in the commercial truck fall-off, and continued assuming that internal combustion engines are doomed.

There might be a little hyperbole there, but not too much, and Tenneco (TEN) certainly continues to get almost no benefit of the doubt. Although second-quarter margins and margin guidance weren't great, the Street seems to be pricing these shares for ugly future margins and cash flow. Likewise, the idea that spinning off the Ride Performance and Aftermarket business will unlock any value seems to be largely dismissed at present. I really can't say that Tenneco is a top-notch idea now, but sector-wide valuations seem to be washing out, and this is a name worth watching for an eventual recovery opportunity.

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With Or Without Federal Mogul, The Street Just Doesn't Care About Tenneco Now

Dana Looks Pinned Under The Wall Of Worry

I was tentatively bullish on Dana (DAN) in late May of this year, but auto and commercial vehicle suppliers continue to weaken in the market, and the shares are down another 15% since then. Maybe I’m missing something big here, but I see Dana as a company with at least decent ongoing leverage to passenger vehicles, an improved position in electrification, and a solid global presence in commercial/off-road vehicles, particularly with the Oerlikon (OTCPK:OERLY) transaction. And yet, the Street continues to price this one as if there’s going to be serious long-term erosion in the business.

I freely admit that Dana doesn’t have the greatest operational track record with respect to margins, FCF generation, and/or ROIC, but the company has improved in recent years and is seemingly getting no credit for that. In a market where many auto and commercial vehicle suppliers appear to be trading below long-term fair values investors certainly have choices, but I continue to believe this name is worth a look.

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Dana Looks Pinned Under The Wall Of Worry

BorgWarner Bumping Along The Bottom In Search Of A Spark

Vehicle components supplier BorgWarner (BWA) continues to sputter along, having not really gone anywhere over the past three months after a nasty decline from the highs to start the year. BorgWarner’s peak-to-today drop has actually exceeded the overall parts sector (down 25% versus down about 15%), even though the company’s actual performance hasn’t been that bad and its positioning for the future transition to hybrids and electrics look good.

I think BorgWarner is cheap enough to warrant serious consideration, but this will probably take more patience to work out. I don’t see a big turnaround in the U.S. car market next year, and I don’t feel all that comfortable counting on a big turnaround in volume in China either. That leaves the shares in a sort of performance no man’s land. I do believe these shares will be at a higher level next year as investors start looking ahead to better auto volumes and gaining more confidence about the path forward for hybrid and electric programs.

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BorgWarner Bumping Along The Bottom In Search Of A Spark

More Clarity On Honeywell's Spinoffs And A Boost To Guidance

There's an ongoing tug of war in the industrial sector between analysts and investors who believe the end is nigh and that the cycle is going to start showing real signs of slowing next year, and the people who actually run those companies who believe business conditions remain strong. While many short-cycle industrials have picked up a little momentum lately, longer-cycle Honeywell (HON) has remained a strong performer throughout, with the shares arguably replacing 3M (MMM) as the must-own in the space.

In relatively short order, Honeywell will become a smaller, more profitable, and faster growing company as it completes the spinoffs of Garrett Motion (GTX) and Resideo Technologies. Spinning these two businesses should, in turn, lead to higher multiples for Honeywell as it will improve the company's margins, returns, and growth prospects. As all of that is going on, Honeywell continues to enjoy healthy demand across many of its businesses, with certain categories (aerospace, UOP, and automation in particular) looking like they have more to give. I've been a steady fan of Honeywell for a while, but given where the shares now sit in terms of valuation, I can't be quite as enthusiastic as before.

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More Clarity On Honeywell's Spinoffs And A Boost To Guidance

Valeo Pounded Down On A Weak Transition Period

I had previously written that I thought Valeo (OTCPK:VLEEY) (VLOF.PA) shares could remain weak as the company stumbled through a weak transitional period, but I didn’t expect the shares to fall by a third on a year-to-date basis. Granted, the sector has been weak (BorgWarner (BWA) is down about 12% year-to-date, as is Schaeffler (OTC:SCFLF), and Continental (OTCPK:CTTAY) and Faurecia (OTCPK:FURCY) are down closer to 15%), but it seems like the shares have been hammered beyond what admittedly weaker-than-expected near-term results would other deserve.

Valeo management is calling for double-digit revenue growth next year, but the sell-side’s stance seems to be more along the lines of “yeah, sure you will…” and the market is not giving much credit for a backlog that should drive meaningful growth in few years’ time, particularly in new hybrid and EV programs. Although Valeo’s performance is doing nothing to build confidence today, if management can deliver better results in the fourth quarter (the third quarter is not looking promising), maybe these shares will finally recapture a little investor support.

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Valeo Pounded Down On A Weak Transition Period

BorgWarner Doing Its Part, But Sentiment Remains Weak

Solid revenue growth, growing margins, and a growing backlog aren't getting it done today for BorgWarner (BWA), which leads to the question of just what exactly it's going to take for investors to want to own vehicle components companies again. Weak production rates and tariff/trade wars don't help sentiment, and rising material costs are still a threat to some extent, but valuations are getting interesting across the space.

As I've said before, stocks don't go up just because they're cheap - valuation alone really isn't much of a catalyst. Accordingly, while I do like BorgWarner both as a company and a stock, I can't say that the shares won't slide another 10% as they have since my last update (when/where I liked the long-term value opportunity). Longer term, I think this is a name to consider, but it will take patience and perhaps management pulling a few rabbits out of its hat at its upcoming September analyst day to get investors interested again.

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BorgWarner Doing Its Part, But Sentiment Remains Weak

EV's And Robots Offer Powerful New Growth Legs For Nidec

As the company goes from strength to strength, I continue to be impressed by the management team at Nidec (OTCPK:NJDCY) (6594.T). Not only does the company continue to gain share with its core brushless motor technology, but it also continues to expand into complementary businesses and find new opportunities to apply its core capabilities. There are still plenty of opportunities to gain share in existing businesses like appliance motors, but the more exciting opportunities are in areas like electric vehicles and robotics.

I wish Nidec was undiscovered and undervalued, but the shares do already reflect at least some of the exceptional growth potential. I suppose a mid-to-high single-digit annualized expected return isn’t terrible in today’s market, and the shares could still outperform if the company surpasses earnings expectations, but it’s tough to call this a cheap stock today.

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EV's And Robots Offer Powerful New Growth Legs For Nidec