BorgWarner Inc - Zacks Investment Research



|BorgWarner Inc. |(BWA-NYSE) |$51.81 |

Note: FLASH REPORT; more details to come, changes are highlighted. Except where noted, and highlighted, no other sections of this report have been updated.

Reason for Report: Flash Update; 1Q18 Earnings

Prev. Ed.: 4Q17 & FY17 Earnings Update, Mar 16, 2018

Flash Update (earnings update to follow)

On Apr 26, 2018, BorgWarner announced its 1Q18 earnings results. The company delivered adjusted earnings of $1.10 per share in 1Q18, beating the Zacks Consensus Estimate of $1.03. Adjusted earnings increased from 91 cents per share in 1Q17.

BorgWarner logged revenues of $2.78 billion, surpassing the Zacks Consensus Estimate of $2.63 billion. The figure was $2.41 billion in 1Q17. The acquisition of Sevcon contributed $20 million to the net sales figure.

In the reported quarter, operating income amounted to $333.5 million compared with 1Q17’s figure of $291.5 million.

Net earnings in the reported quarter came in at $225 million compared with $189 million in 1Q17.

Segment Details

Revenues from the Engine segment increased to $1.72 billion from $1.5 billion in 1Q17. Excluding the impact of foreign currencies, net sales rose 4.9% in the segment.

At the Drivetrain segment, revenues were up $1.08 billion in the first quarter from $925 million in 1Q17. Excluding the impact of foreign currencies and acquisition of Sevcon, net sales rallied 9.2% year over year.

Financial Position

BorgWarner had $409.7 million in cash as of Mar 31, 2018 compared with $545.3 million as of Dec 31, 2017. The long-term debt was $2.13 billion compared with $2.1 billion as of Dec 31, 2017.

In 1Q18, net cash provided by operating activities was $35 million compared with $60 million in 1Q17. During the quarter, capital expenditures, including tooling outlays, increased to $160 million from $131 million in 1Q17.

Dividend

The company announced that its board has approved a quarterly cash dividend of 17 cents per common stock. The amount will be paid on Jun 15, 2018 to shareholders as of Jun 1, 2018.

Outlook

For 2Q18, the company envisions net earnings to lie within the range of $1.09-$1.11 per share. Moreover, it anticipates net organic sales growth of 7-9% compared with net sales of $2.39 billion in 2Q17. The buyout of Sevcon will contribute $50 million to net sales.

For FY18, the company reaffirmed organic growth guidance. It projects net sales of around $10.77-$10.94 billion, which translates into an organic growth rate of 5-7%. Further, the company projects net earnings within the range of $4.30-$4.40.

Furthermore, BorgWarner expects positive impact of foreign currencies on the appreciation of the Euro and Chinese Yuan of $405 million.

MORE DETAILS WILL COME IN THE IMMINENT EDITIONS OF ZACKS RD REPORTS ON BWA

Portfolio Manager Executive Summary [Note: Only highlighted material has been changed.]

BorgWarner Inc. is a leading manufacturer of powertrain products for the world’s major automakers. The company’s customers include Volkswagen/Audi, Ford, Toyota, Renault/Nissan, General Motors, Hyundai/Kia, Daimler, Chrysler, Fiat, BMW, Honda, John Deere, PSA and MAN. The company has operating, manufacturing and technical facilities in 66 locations across North America, South America, Europe and Asia. Its products are capable of improving vehicle performance and stability along with fuel efficiency and emission levels. The company employs approximately 29,000 people worldwide.

Of the 15 firms in the Zacks Digest group covering the stock, seven firms provided positive ratings, six gave neutral ratings and two firms had a negative stance. Of the total, 12 firms provided target prices.

Positive or equivalent stance (7/15 firms or 46.7%) – The bullish firms believe that BorgWarner will revert back to higher incremental margins by 4Q18 and the trend will continue till FY19 on the back of backlog-driven growth and cost actions. The firms remains focused on bolt-on acquisitions and maintaining strong liquidity. Further, a healthy balance sheet and steady cash flow will help BorgWarner return capital to shareholders. In addition, the firms believe that the company’s products enjoy a competitive advantage owing to their highly-engineered nature. The firms believe that the company is particularly set to grow in China. With the rising trend of euro, the firms view upside potential.

Neutral or equivalent stance (6/15 firms or 40%) – The cautious firms believe that BorgWarner will revert back to higher incremental margins by 4Q18 and the trend will continue till FY19 on the back of backlog-driven growth and cost actions. The firms remain focused on bolt-on acquisitions and maintaining strong liquidity. The firms appreciate the company’s business model and expect opportunities for earnings growth and margin expansion in the long run. However, some firms are apprehensive about the softness in auto sales in the Chinese and European markets.

Negative or equivalent stance (2/15 firms or 13.3%) – These firms are worried about the diesel mix headwind along with the softness in auto sales in the Chinese markets.

Mar 16, 2018

Overview [Note: Only highlighted material has been changed.]

Based in Auburn Hills, MI, BorgWarner Inc. is a leading manufacturer of powertrain products for the world's major automakers. Its products are manufactured and sold worldwide, primarily to original equipment manufacturers (OEMs) of passenger cars, SUVs, trucks and commercial transportation products. The company operates in two segments – Engine and Drivetrain.

The Engine segment develops and manufactures products, which include turbochargers, chains, emission and thermal systems. The segment also produces fluid pumps including engine hydraulic pumps for variable cam timing and engine lubrication. The segment accounted for about 61.9% of sales in 4Q17.

The Drivetrain segment engineers and manufactures components for automatic transmission and systems that combine such components. Products include friction plates, one-way clutches, transmission bands, torque converters, and lock-up clutches for automatic transmission. The segment also offers polymer fans for engine cooling systems and sells products to OEMs of commercial trucks, buses as well as agricultural and off-highway vehicles, primarily in North America, South America, Europe and Asia. The segment accounted for about 38.7% of sales in 4Q17.

Key investment considerations as identified by the brokerage firms are as follows:

|Key Positive Arguments |Key Negative Arguments |

|BorgWarner has a strong technology-based product portfolio. |The company’s results could be affected by rising raw material costs. |

|The company is a leader in fuel-efficient engine and transmission |Development of key technologies by competitors poses a threat to the |

|technologies. |company. |

|The company is well positioned to grow globally through new business |The company faces continued pricing pressure from OEMs to reduce |

|opportunities. |costs. |

|The company will grow with increased production along with steady | |

|prices. | |

|The company has diversified across the globe. This reduces the | |

|negative impact from market share losses. | |

Further information on the company can be found at .

Note: The company’s fiscal year coincides with the calendar year.

Mar 16, 2018

Long-Term Growth [Note: Only highlighted material has been changed.]

Automakers are striving to provide vehicles with higher fuel efficiency, lower emission and an enhanced driving experience, and BorgWarner’s powertrain technology helps meet these objectives. The company’s products are advanced in terms of design, manufacturing and materials. BorgWarner is expected to boost the development of turbochargers for advanced diesel and gasoline direct injected (GDI) engines in the next few years.

Demand for DualTronic, the dual clutch transmission (DCT) system, that improves fuel efficiency by 15%, is expected to increase, going forward. BorgWarner expects an increase in demand for DCT modules to 8 million units by 2016.

BorgWarner completed the restructuring of its Drivetrain segment at 2015-end which has been boosting profits. The bullish firms believe that this will lead to a low cost structure and enhance BorgWarner’s ability to win new businesses. BorgWarner expects this restructuring to lead to adjusted earnings before interest and taxes (EBIT) margin improvement of 100 basis points in the Drivetrain segment. In addition, the ramping up of the North American program, which had adversely affected Drivetrain’s sales, will benefit the company’s results. It is expected that this improvement, along with benefits from the European restructuring, will boost Drivetrain’s margin in 2016.

BorgWarner expects to generate net new business of $410–$590 million in 2017, $460–$670 million in 2018, and $500–$700 million in 2019. As a result, organic compound annual growth rate is estimated to be 5–7% from 2016 through 2019. About 62% of the new net business in the 2016–2019 period is expected to stem from engine-related products, while the remaining 38% should be generated from drivetrain-related products.

Asia, the Americas and Europe are expected to generate 40%, 39% and 21%, respectively, of the new business over three years. China (32%) and North America (25%) are anticipated to contribute to a major portion of growth.

However, BorgWarner faces stiff competition in the areas of technological innovation, application engineering development, quality, price, delivery and product launches. The company also faces continued pressure from OEMs to reduce costs. Annual price reductions to OEM customers have become a common practice. The company continues to improve its production processes to increase efficiency. Also, it updates product designs to reduce costs alongside developing new products to improve profits. However, it is unable to pass on any increase in raw material costs to its OEM customers. Cost recovery is often less than 100% and usually on a delayed basis. This can affect the company’s profit margins.

Mar 16, 2018

Target Price/Valuation [Note: Only highlighted material has been changed.]

Provided below is a summary of target price/valuation as compiled by Zacks Digest:

|Rating Distribution |

|Positive |46.7%↓ |

|Neutral |40%↑ |

|Negative |13.3%↑ |

|Avg. Target Price |$55.67↑ |

|Digest High |$75.00↑ |

|Digest Low |$28.00 |

|Upside from Current |8.2% |

|No. of Analysts with Target Price/Total |12/15↓ |

Risks to the target prices include a huge decline in global vehicle production, weaker-than-expected demand for transfer cases, the potential for worse-than-expected production in Western Europe, lower penetration of BorgWarner’s fuel-efficient technologies, higher raw material costs and slowing adoption rates for diesel engines and turbochargers.

Recent Events [Note: Only highlighted material has been changed.]

On Feb 8, 2018, BorgWarner reported adjusted earnings of $1.07 per share in 4Q17, beating the Zacks Consensus Estimate of $1.02. Adjusted earnings increased from 85 cents reported in the year-ago quarter.

Revenue [Note: Only highlighted material has been changed.]

BorgWarner reported total revenues of $2.59 billion in 4Q17, an increase of 14.6% year over year. Revenues surpassed the Zacks Consensus Estimate of $2.5 billion. Excluding the impact of foreign currencies and the net impact of acquisition, net revenues went up 10.2% year over year.

Segmental Details

Revenues from the Engine segment grew 13.7% y/y to $1.58 billion. Excluding the impact of foreign currencies, net sales advanced 8.4% in the segment.

Revenues from the Drivetrain segment increased 15.9% to $1.02 billion. Excluding the impact of foreign currencies and the Remy International acquisition, net sales rose 13.1% y/y.

Outlook

The company projects net sales growth for 1Q18 in the range of 3-5.5%. Also, foreign currencies are expected to have a positive impact of $100 million.

Net sales for FY18 are expected to grow 5-7%. The company sees positive impact of foreign currencies of $170 million due to appreciation of Euro.

The firms expect benefits from new business launches to gradually gain accretion. They believe the actual results can be on the higher end of the guidance range. Moreover, the firm is expected to benefit from vehicle electrification.

Margins [Note: Only highlighted material has been changed.]

Gross profit increased to $565.9 million in 4Q17 from $501 million in 4Q16. Also, cost of sales rose to $2 billion from $1.8 billion in 4Q16. Selling, general and administrative expenses increased to $239.9 million in 4Q17 from $217.1 million in 4Q16.

Operating income grew to $209 million or 0.1% of net sales, as against a loss of $458 million in 4Q16.

Segment Details

Engine segment: Adjusted earnings before interest, income taxes and non-controlling interest (adjusted EBIT) improved to $266 million in the reported quarter. Excluding the impact of foreign currencies, Adjusted EBIT was $258 million, up 2.9% from the year-ago period.

Drivetrain segment: Adjusted EBIT increased to $124 million in 4Q17. Excluding the impact of foreign currencies, Adjusted EBIT was $124 million, up 32.6% a year ago.

Outlook

The company expecxts operating margin for FY18 to have a positive impact of 12.6-12.7%.

The company is likely to gain from cost-control initiatives. Also, an improving top line and financial discipline are expected to drive the company’s operating margin.

Earnings per Share [Note: Only highlighted material has been changed.]

BorgWarner reported adjusted earnings of $1.07 per share in 4Q17, beating the Zacks Consensus Estimate of $1.02. Adjusted earnings increased from 85 cents reported in the year-ago quarter

Outlook

Net earnings for 1Q18 are expected to be in the range of 99 cents to $1.31 per share compared with the previous guidance of 99 cents to $1.01 per share.

Further, BorgWarner expects an improved net earnings range for FY18, reiterated as $4.25-$4.35 from the previous guidance of $3.81-$3.83 per share. This increase in guidance was primarily due to lower tax rate assumption and larger benefit from foreign currencies.

Earnings are expected to benefit from acquisitions and an active share repurchase program. New businesses will further diversify the customer base and enhance geographic exposure, leading to higher return on invested capital.

Mar 16, 2018

|Analyst |Gargi Dam Kanunjna |

|Copy Editor |NA |

|Content Ed. |NA |

|Lead Analyst |Sanjoy De |

|QCA |Anindya Barman |

|No. of brokers reported/Total |NA |

|brokers | |

|Reason for Update |1Q18 Flash Update |

| | |

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Apr 26, 2018

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