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

Valeo Stuck In A Construction Zone, But An Attractive Highway Awaits

This has been a challenging year for French auto parts supplier Valeo (OTCPK:VLEEY

, VLOF.PA). With recent disappointments in the company’s revenue growth and ongoing investments in electric vehicle (or EV) and driver assistance technologies pressuring margins, the shares haven’t performed quite as well as investors might have hoped. What’s more, there are near-term challenges like the status of Korean OEMs within China that could continue to pressure revenue in the short term.

Even so, I believe these are short-term impediments to a strong long-term story. Along with rival Continental AG (OTCPK:CTTAY), Valeo is carving out a strong position in the emerging EV ecosystem, and the company is well placed to capture significant content share in hybrids and pure electrics. Other opportunities like driver assistance remain attractive as well, with Valeo having an uncommonly broad technology footprint. A long-term target of 8% revenue growth and low-teens free cash flow growth is hardly conservative for any established auto parts company, but I believe Valeo’s leverage to EVs and ADAS can support it, and those projections in turn support a fair value about 10% higher than today’s price.

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Valeo Stuck In A Construction Zone, But An Attractive Highway Awaits

Sensata Technologies Has Cooled, And That May Be An Opportunity

Sensata Technologies (NYSE:ST) is an example of what happens when a high-expectations story doesn't live up to those expectations. While the company has performed reasonably well since my last update from a financial/operating perspective, the shares are down about 7% since my last update and down about 12% this year as investors have come to realize that auto sales can't grow to the sky.

I do believe this may be a good time to do some due diligence on Sensata. The company still has strong positions in its addressed sensor and control markets, and sensors offer some respectable long-term margin opportunities. What's more, there's a lot more Sensata can do to grow its business outside of autos, while also leveraging the benefits of past acquisitions. If Sensata can pair mid single-digit revenue growth with high single-digit FCF growth, these shares look undervalued today and priced for a double-digit annualized return.

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Sensata Technologies Has Cooled, And That May Be An Opportunity

Seeking Alpha: Denso Needs To Diversify To Maximize Its Opportunities

As one of the biggest auto component suppliers in the world, Denso's (OTCPK:DNZOY) (6902.T) basic operating environment isn't all that much different than that at Continental AG (OTCPK:CTTAY), Valeo (OTCPK:VLEEY), Bosch, Delphi (NYSE:DLPH), BorgWarner (NYSE:BWA) and so on. Major trends like electrification, fuel efficiency/emissions, and driver assistance loom large when considering Denso's future growth. On the other hand, Denso's reliance on Toyota (NYSE:TM) is a notable difference, and I'm not sure Denso has shown it has the products/technology to clearly stand out from the crowd - at least in the initial launch windows for many of these technologies.

Given its different product, customer, and technology exposures, I'm expecting less revenue growth from Denso than I am from BorgWarner, Continental, Delphi, and Valeo over the long term, but that's not to say I don't like the company and a long-term revenue CAGR of 5% isn't exactly soft by auto supplier standards. I do expect some margin uplift as Denso moves beyond significant start-up/launch expenses, but improving its gross margin and free cash flow efficiency would be a welcome positive driver. Denso looks undervalued enough to consider, but I can't call it my favorite name in the sector on the basis of underlying company quality.


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Denso Needs To Diversify To Maximize Its Opportunities

Seeking Alpha: Delphi Automotive Poised For Growth, And Wall Street Knows It

Like so many other companies in the auto parts and components space, Delphi Automotive (NYSE:DLPH) hasn't had the best run of performance over the past year. While the sector has rebounded off January lows, Delphi (like Continental AG (OTCPK:CTTAY), Denso (OTCPK:DNZOY), and Valeo (OTCPK:VLEEY)) has gotten dinged on weaker guidance in 2015 and forward-looking concerns about the health of the auto markets in Western Europe, North America, and China.

Like those aforementioned names, Delphi has some appealing leverage to the major growth drivers in the auto space - growing electrification of vehicles, more efficient internal combustion engines, and growing adoption of driver assistance technologies. I believe that these trends can push the company to double-digit long-term cash flow growth, but more of that potential seems to be factored into the price relative to Valeo.

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Delphi Automotive Poised For Growth, And Wall Street Knows It

Seeking Alpha: Continental AG Revving Up For The Next Wave In Autos

If success in a business was always linked to size, Continental AG (OTCPK:CTTAY) would be an easy pick in the auto parts/components space, as this is the third-largest supplier in the world and the second largest in Europe. The auto sector is seeing a lot of change, though, as OEMs have to produce more efficient, less polluting cars to stay in compliance with evolving regulations and the adoption of more electrical and hybrid technologies is likely to lead to disruption across the market.

I believe Continental is well placed to benefit from this transition and to maintain its strong position in the market. It also doesn't hurt the story that the company's tire business is quite profitable and a market share gainer. I think Continental's size does limit its future growth prospects somewhat and the valuation isn't quite as compelling as I'd like to see.

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Continental AG Revving Up For The Next Wave In Autos

Seeking Alpha: Even After A Strong Run, Valeo Not Getting Its Full Due

Valeo (OTCPK:VLEEY) has been a trooper since I last wrote on this large auto parts supplier, with the ADRs up more than 20% and meaningfully outperforming peers like Continental (OTCPK:CTTAY) (up slightly), Denso (OTCPK:DNZOY) (down 10%), and BorgWarner (NYSE:BWA) (down 40%). Better yet, the story seems to be getting better and better, as the company is seeing strong order growth and management has laid out a technological/product platform vision that really seems to fit where OEMs are going with passenger vehicle designs and features.

I'm still bullish on Valeo and I've bumped up some of my modeling assumptions since the last time I talked about the company. I think long-term growth of 6% to 7% is a little aggressive (likely to be more than double the underlying growth rate in unit production) but do-able. Likewise, I'm a little concerned that mid single-digit FCF margins could be ambitious given the company's history, but I think leveraging past R&D investments and standing out from the crowd in terms of product features and market share can support it.

Investors should note that Valeo's ADRs have only so-so liquidity, so the local shares might be a better option for investors willing to go that extra step.

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Even After A Strong Run, Valeo Not Getting Its Full Due

Seeking Alpha: Lost Credibility And Shifting Priorities Hammer BorgWarner

Wall Street shows no mercy when its favorites don't live up to their multiples, and BorgWarner (NYSE:BWA) is a case in point. This powertrain specialist has not only delivered a series of disappointing earnings and guidance reports, but the company has seen a sharp contraction in its backlog and its content share growth. Now concerns are building that BorgWarner's focus on internal combustion engine (or ICE) technologies are going to leave it outside of the industry's sweet spot as companies like Volkswagen (OTCPK:VLKAY) accelerate their development of hybrid and electric vehicles.

To me, a lot of this sounds like the familiar Wall Street whipsawing between "can do no wrong" and "can't do anything right" when analysts have to shift from justifying high relative valuations to explaining why those prior justifications are no longer relevant. I do think BorgWarner has some serious growth and credibility challenges to address in the short term, but I think ICE-powered passenger vehicles are going to be around for a while, and I wouldn't count out BorgWarner as a player on the electrical side.

These shares could be undervalued by 50% or more, but the company must return to reliable average-growth with improved free cash flow margins. I still like the long-term prospects for the company, but the stock may have a tougher go in the short term.

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Lost Credibility And Shifting Priorities Hammer BorgWarner

Seeking Alpha: 2015 May Be Tough, But BorgWarner Is Tougher

All in all, BorgWarner (NYSE:BWA) hasn't really gone anywhere since I last wrote about this high-quality auto parts supplier. While the shares have traded between $48 and $68, the net change since that last article has been virtually zero. That's not too surprising relative to the performance of Cummins (NYSE:CMI), Allison (NYSE:ALSN), or Tenneco (NYSE:TEN), but it is enough to have me reconsidering whether this is a buying opportunity for a stock that is rarely cheap and a company that is well-placed to leverage the seemingly inexorable drive toward more efficient vehicles.

With increasingly demanding fuel economy and emission requirements potentially adding more than $1,000 in vehicle content by 2020 (and continuing on after), I like the prospects for BorgWarner to deliver strong revenue growth and at least decent margin leverage. This year could be dicey given foreign exchange headwinds and uninspired European production expectations, and the valuation is not a screaming bargain on a cash flow basis, but few comparables seem as well-placed to generate multiple years of double-digit growth as BorgWarner.

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2015 May Be Tough, But BorgWarner Is Tougher

Seeking Alpha: Sensata Offers Great Market Share And Growth Potential, At A Price

Sensor and control manufacturer Sensata Technologies (ST) has the sort of stock that can test an investor's resolve to stick to value discipline. There are not all that many companies that manage to carve out 30%-plus market share in multibillion-dollar markets, let alone that still have mid-to-high single-digit growth potential just on the basis of content growth. Add in a commitment to complementary M&A and I expect Sensata to be a high-quality growth story. I have no doubt that some investors will find arguments to support a case that Sensata is notably undervalued today, but I don't see it and I think this is a prime candidate for the watch list.

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Sensata Offers Great Market Share And Growth Potential, At A Price

Seeking Alpha: Valeo In The Right Places At The Right Time

At first glance, there's a lot to like about France's Valeo SA (OTCPK:VLEEY). More than half of the company's product portfolio addresses CO2 emissions reduction and the company is among the industry leaders in multiple lines of business. Valeo also boasts a fast-growing, share-gaining business in China, where margins are meaningfully better than in Europe. All this and an EV/EBITDA valuation below peer-group averages.

There are some flies in the ointment, however. Valeo's apparent improvements in operating performance may not be all they appear and valuation isn't quite as compelling after making a few adjustments. I wouldn't sell or avoid Valeo purely on the basis of valuation and non-cash accounting adjustments, though, and this is still a reasonably priced alternative to other quality parts/component companies like BorgWarner (BWA) or Cummins (CMI).

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Valeo In The Right Places At The Right Time

Investopedia: Harman Looks To Carry A Tune

Like many auto components suppliers, Harman (NYSE:HAR) is seeing sales pick up as car sales rebound in the developed world and grow rapidly in emerging markets. The question for Harman investors, though, is whether the company can continue to convince OEMs to stick with their systems in lieu of internal development or partnerships with smart device manufacturers.

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