In this article, let's take a look at BorgWarner Inc. (BWA, Financial), a $13.99 billion market cap company, which is a leading supplier of highly engineered components and systems for automotive drive train applications.
Liquidity and Debt Levels
The firm operates in a highly competitive industry, where logical cyclical demands could hurt cash flows and the sustainability of the businesses.
The trailing debt-to-equity ratio is 0.37% for the fiscal year that ended in Dec. 2014, and is below the industry average. Further, the company maintains an adequate quick ratio of 1.14, which is ranked higher than 70% of the 1391 Companies in the Auto Parts industry.
Revenues, Margins and Profitability
Looking at profitability, revenues rose by 5.4% but earnings per share slightly decreased in the most recent quarter compared to the samequarter a year ago ($0.61 vs $0.62). During the past fiscal year, the company increased its bottom line. It earned $2.86 versus $2.71 in the previous year. This year, Wall Street expects an improvement in earnings ($3.50 versus $2.86).
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 | 17.80 |
| ALV | Autoliv Inc. | 12.61 |
| LEA | Lear Corp. | 21.87 |
| VC | Visteon Corp. | 23.17 |
| GNTX | Gentex Corp. | 19.96 |
| Â | Industry Median | 8.95 |
The company has a current ROE of 17.80%, which is higher than the industry median and higher than the one exhibit by Autoliv Inc. (ALV, Financial). In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So, for investors looking at those levels, Visteon Corp. (VC, Financial), Lear Corp. (LEA, Financial) and Gentex Corp. (GNTX, 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 21.6x, trading at a premium compared to an average of 19.30x for the industry. To use another metric, its price-to-book ratio of 3.87x indicates a premium versus the industry average of 1.67x while the price-to-sales ratio of 1.70x is above the industry average of 0.71x.
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 $33.297, which represents a 27.2% compound annual growth rate (CAGR).
Final Comment
I think that global vehicle production will continue increasing with much focus on fuel-efficient vehicles. This global trend should make BorgWarner to increase revenues 7% annually through 2017.
Hedge fund gurus like Chuck Royce (Trades, Portfolio), Louis Moore Bacon (Trades, Portfolio), Steven Cohen (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio) and Jim Simons (Trades, Portfolio) have added this stock to their portfolios in the last quarter of 2014.
Disclosure: Omar Venerio holds no position in any stocks mentioned
