We currently upgraded our recommendation on BorgWarner Inc. (BWA) to Outperform from Neutral. Based in Michigan, BorgWarner is a leading manufacturer of powertrain products for the world's major automakers. Its products include four-wheel-drive and all-wheel-drive transfer cases (primarily for light trucks and sport utility vehicles or SUVs), automatic transmission and timing chain systems. These products are manufactured and sold worldwide, primarily to OEMs of passenger cars, SUVs, trucks and commercial transportation products.
BorgWarner released its second quarter earnings on July 28, 2011. The company reported a 44% increase in profit to $1.12 per share in the second quarter of 2011 from 78 cents per share (both excluding a non-recurring item) in the prior-year quarter.
Revenues in the quarter soared 28% to $1.82 billion, despite a 2% fall in global vehicle production. The increase in sales was attributable to higher global demand for advanced powertrain technology, focus on fuel economy, and emissions reductions.
Excluding the impact of currency and sales related to the acquisition of Haldex Traction Systems, which was completed in the first quarter of 2011, sales rose 15% in the quarter. Excluding a pre-tax gain of $29 million related to the Honeywell settlement, operating income was $199 million or 11.0% of sales.
BorgWarner now expects sales to grow in the range of 25% to 28% for full-year 2011, up from the previous outlook of 19% to 23%. The company also raised its EPS guidance to $4.25 to $4.45 from $3.85 to $4.15. The improved guidance was driven by new business growth and better cost-control measures.
Advances in design, manufacturing and materials are expected to boost the growth of turbochargers for advanced diesel and gasoline direct injected (GDI) engines going forward. The market for turbocharged GDI engines is expected to increase from about 2.5 million in 2009 to over 6 million by 2012.
Furthermore, we expect benefits to accrue from the ramp-up of DualTronic, the dual clutch transmission (DCT) system that improves fuel efficiency by 15%. BorgWarner expects demand for DCT modules to improve tenfold by 2014 to 5 million units.
Moreover, the company’s recent acquisitions are also expected to be accretive to its business expansion plans. In 2010 and 2011, the company made two significant acquisitions. In April 2010, the company acquired Dytech ENSA S.L., headquartered in Vigo, Spain. In January 2011, the company acquired the Traction Systems division of Haldex Group, a leading provider of innovative all-wheel drive products for the global vehicle industry headquartered in Stockholm, Sweden.
BorgWarner also holds a Zacks#2 Rank that implies a Buy rating in the short term (3 to 6 months).
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