We maintain our Neutral recommendation on BorgWarner Inc. (BWA) based on its improved first quarter 2013 performance. However, we are concerned about the pricing pressure from OEMs and strong competition.
Why Kept at Neutral?
On Apr 25, BorgWarner posted a 1.6% year-on-year increase in adjusted earnings to $1.30 per share (excluding non-recurring items) in the first quarter of 2013. Earning per share surpassed the Zacks Consensus Estimate by 8 cents.
Revenues dipped 3.2% to $1.85 billion, but were marginally ahead of the Zacks Consensus Estimate of $1.84 billion. The decrease in revenues was due to a 9% decline in light vehicle production in Europe, which accounts for over half of the company’s sales.
Following the release of the first quarter results, the Zacks Consensus Estimate for 2013 increased 0.4% to $5.33 per share. Meanwhile, the Zacks Consensus Estimate for 2014 decreased 0.2% to $6.31 per share. Currently, BorgWarner maintains a Zacks Rank #3 (Hold).
We believe that BorgWarner’s advanced design and fuel efficient technologies will boost its results going forward. The company expects 80% of its new business to come from engine-related products including turbochargers, ignition systems, emissions products, engine timing systems, variable cam timing modules and thermal systems. The remaining 20% will be generated from drivetrain-related products including the fuel-efficient DualTronic transmission technology, traditional automatic transmission and all-wheel drive technologies.
BorgWarner expects annual sales to rise 2% to 6% in 2013. Excluding the impact of 2012 dispositions, net sales are expected to improve 3% to 7%. The company also expects net earnings between $5.15 and $5.45 per share for the year and operating margin to be higher than 11.5% in 2013.
However, we remain concerned about the strong competition faced by BorgWarner. Some of its close rivals have developed path-breaking technologies, which may jeopardize demand for the company’s products. In addition, BorgWarner faces continuous pricing pressure from original equipment manufacturers to reduce raw material costs.
Other Stocks to Look For
Some stocks that are performing well in the industry include Tower International, Inc. (TOWR), STRATTEC Security Corporation (STRT) and Visteon Corp. (VC). All these companies carry a Zacks Rank #1 (Strong Buy).
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