In this article, let's take a look at BorgWarner Inc. (BWA, Financial), a $13.36 billion market cap company that is a leading supplier of highly engineered components and systems primarily for automotive drivetrain applications.
Key drivers
BorgWarner develops advanced powertrain technologies that help improve fuel economy while reducing emissions. It will benefit from clean air legislation and consumers' demand for fuel economy. Further, auto manufacturers can comply with increasingly emissions standards.
The company will benefit as well from its innovation, with products that aim to avoid sacrificing engine performance. The idea is to increase content provided per vehicle by introducing new products. Moreover, the development of systems that will be used in hybrid and electric vehicles is a growth opportunity.
It will be good news if U.S. and European demand for new passenger vehicles recovers faster than expected. Last year, about one-fourth of sales came from the U.S., almost half from Europe and the remaining 25% from Asia and other regions.
The Drivetrain division's products are primarily transmission components for torque management applications. This segment, which includes the firm's dual-clutch technology, or DCT, will also benefit from the increased demand for fuel economy and lower emissions mentioned above.
Revenues, margins and profitability
Looking at profitability, revenue grew by 12.5%, but earnings per share remained flat in the most recent quarter compared to the same quarter a year ago ($0.73). During the past fiscal year, the company increased its bottom line. It earned $2.71 versus $2.08 in the previous year. This year, Wall Street expects an improvement in earnings ($3.32 versus $2.71).
Finally, let's compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.
Ticker | Company | ROE (%) |
BWA | BorgWarner | 18.09 |
LEA | Lear Corp. | 15.87 |
DAN | Dana Holding Corp | 19.78 |
VC | Visteon Corp | 26.83 |
 | Industry Median | 10.16 |
The company has a current ROE of 18.09% which is higher than the one exhibited by Lear Corp. (LEA, Financial).In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So for investors looking those levels or more, Dana Holding (DAN, Financial) and Visteon Corp. (VC, Financial) could be the options. It is very important to understand this metric before investing and it is important to look at the trend in ROE over time.
Relative Valuation
In terms of valuation, the stock sells at a trailing P/E of 20.5x, trading at a discount compared to an average of 16.0x for the industry. To use another metric, its price-to-book ratio of 3.6x indicates a premium versus the industry average of 1.47x while the price-to-sales ratio of 1.6x is above the industry average of 0.65x.
As we can see in the next chart, the stock price has an upward trend in the five-year period. If you had invested $10,000 five years ago, today you could have $38,044, which represents a 30.7% compound annual growth rate (CAGR).
Final comment
As outlined in the article, we expect an increase in fuel economy standards, for example the carbon-dioxide emission legislation in Europe. The industry is subject to fierce competitive and the cyclicality of the demand could lead to some fear when talking about sustainability of profits in the long term. The company's largest customers are Volkswagen (VLKAY, Financial), 16% of 2013 sales, and Ford (F, Financial), 14%, which made me bullish on this stock.
Hedge fund guru Ken Fisher (Trades, Portfolio) added this stock to their portfolios in the second quarter of 2014.
Disclosure: Omar Venerio holds no position in any stocks mentioned