BorgWarner (BWA, Financial) released outstanding results in the recently reported fourth quarter. However, the results were soft on an year-over-year basis. Still, BorgWarner managed to impress investors with good results in fourth quarter. But just 6% growth in the revenue on year-over-year basis is not so impressive and BorgWarner should give a thought on improving its financial performance in 2015. However, the management is confident of achieving better results in future on the back of solid sales growth across its engine segment which is expected to ramp up in 2015 with the recovering U.S economy. Let us have a look at some of BorgWarner’s core strengths.
End-market opportunity is strong
BorgWarner is one of the leading automotive parts supplier primarily dealing in Powertrain products including both manual and automatic transmission. Despite a shaky performance on a year-over-year basis, BorgWarner is seeing some positive impact on its financials stemming from the engine segment, which is seeing strong progress. The company is seeing growing demand for turbochargers in Europe, China and Korea which will ramp its sales growth, contributing meaningfully to company’s growth in the coming quarters.
But the company is worried about the soft performance from Drivetrain. The segment is down consistently and the performance is also affected by the foreign currency exchange rates fluctuations. Still, BorgWarner is seeing some hope for Drivetrain in Europe. It is seeing growing demand for higher dual clutch transmission which is expected to help the company to improve its performance under drivetrain.
Better prospects
Moving ahead, BorgWarner is mainly looking for strengthening its long term prospects. As it is very critical for it, it has already started moving equipment from its Western European operations to Poland. On the hand other, this move by BorgWarner is expected to strengthen its product portfolio as demand for its high end products ramp up across the world. Also the growing Engine segment and restructuring Drivetrain might also play a key role in its growth story. In addition, BorgWarner also has aggressive investment plans.
The company continues to invest in some long term growth segments - mainly including machinery and equipment. However, the company is also looking to gain in the short term therefore it is also parking its funds in new plant and plant expansion initiatives. As 2015 is an important year for the company, it is planning to aggressively invest in growth and R&D initiatives for the full year and slowly return to its normal capital spending scheme in future.
To meet the growing demand, BorgWarner is also expanding its footprints in other parts of the globe as well. Under this, it has recently opened a new production plant in Viana Do Castelo in Portugal which is helping it well to meet the growing demand for several gas exhaust gas recirculation technologies as well as dual-clutch control modules for both passenger cars and commercial vehicles.
Some positive growth indicators
BorgWarner has strong long term prospects. It is likely to benefit from the recovering U.S economy along with lower steel prices and booming automotive segment. As the economy across U.S is improving it has affected many industries including automotive. On the other hand, the automotive industry is also expected to grow on the back of lower steel prices which will lead to a ramp in the demand for automobiles which will also be accelerated by the lower interest rates. As the demand for the automobiles increases, the demands for the automotive parts will also increase, giving companies within this industry including BorgWarner good growth opportunities in future.
The stock also looks reasonable with a trailing P/E of 21.03 while the forward P/E of 14.60 indicates good earnings growth in the near term. The profit margin of 7.90% is also attractive and can lead it to gain more market share. All these valuation levels look favourable for BorgWarner making it definitely a good pick as of now.
