On Sep 26, 2013, we maintained our Neutral recommendation on
). We appreciate the company's improved performance in the second
quarter of 2013. BorgWarner will benefit from the rise in demand
of fuel-efficient powertrain solutions in Brazil and exhaust gas
recirculation products for passenger cars and commercial diesel
vehicles. However, we are concerned about the pricing pressures
from OEMs and strong competition prevailing in the market.
Why the Reiteration?
On Jul 25, BorgWarner posted a 10.3% increase in adjusted
earnings to $1.50 per share in the second quarter of 2013
compared with $1.36 in the second quarter of 2012. Earnings per
share surpassed the Zacks Consensus Estimate by 9 cents.
Revenues increased 2% to $1.89 billion, but missed the Zacks
Consensus Estimate of $1.92 billion. The improvement in revenues
was driven by a 3% increase in Global light vehicle production.
Light vehicle production in Europe increased 1% year over year.
Following the release of the second-quarter results, the Zacks
Consensus Estimate for fiscal 2013 increased marginally by 0.2%
to $5.51 per share. However, the Zacks Consensus Estimate for
fiscal 2014 declined 0.3% to $6.44 per share.
BorgWarner will benefit from the rise in demand for
fuel-efficient powertrain solutions in Brazil and its leading
position as a supplier of eco-friendly technologies. The company
is expanding its technological leadership in engine and
drivetrain components in Brazil. It is setting up a new
215,200-square-foot production facility and engineering center in
Brazil, which will help car manufacturers to comply with the new
regulations under the INOVAR-AUTO program. In addition, the
company is also expanding in Portugal.
BorgWarner anticipates that annual sales will improve between 3%
and 5% in 2013. The company expects global production volumes to
be up approximately 2% in 2013. The increase is primarily driven
by a 5% and 10% increase in production in North America and
China, respectively. The company also increased its net earnings
expectation for the year to $5.40-$5.55 from the prior estimate
of $5.15-$5.45 per share.
However, we are concerned about risk associated with customer
concentration. Its major customers like
Ford Motor Co.
) accounted for about 17% and 13%, respectively, of total sales
in 2012. Thus, a loss of any of these major clients can
significantly reduce the company's earnings. In addition,
innovative technologies from peers mar demand of BorgWarner's
products; thus adversely affecting the results of the company.
Other Stocks to Look For
American Axle & Manufacturing Holdings Inc.
), a Zacks Rank #1 (Strong Buy) stock, is currently performing
well in the original auto and truck industry.
Currently, BorgWarner retains a Zacks Rank #2 (Buy).
AMER AXLE & MFG (AXL): Free Stock Analysis
BORG WARNER INC (BWA): Free Stock Analysis
FORD MOTOR CO (F): Free Stock Analysis Report
VOLKSWAGEN-ADR (VLKAY): Get Free Report
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