Law Would Shift Borg Warner into High Gear

08/02/2011 4:00 pm EST


Jim Jubak

Founder and Editor,

If you’re looking for an auto supplier positioned to profit from the auto industry’s drive to raise fuel efficiency in a world of $100-a-barrel oil, then Borg Warner (BWA) is your stock.

The Obama administration’s proposal to take US fuel-efficiency standards to 54.5 miles per gallon by 2025 makes Borg Warner’s emphasis on turbochargers (including turbochargers for Europe’s popular diesels), engine-timing systems, emissions systems, and components for high-efficiency transmissions (such as the company’s dual clutch automatic transmissions) seem like a case of the right product mix at the right time.

On July 28, the company reported second-quarter earnings of $1.12 a share (excluding one-time items), or 13 cents above Wall Street projections. Revenue climbed 28% from the second quarter of 2010 to $1.82 billion. Wall Street had been looking for revenue of $1.74 billion.

And looking forward, the company raised guidance for 2011 to $4.25 to $4.45 a share, from the prior projection of $3.85 to $4.15 a share. Revenue will grow by 25% to 28% for the year, to a range of $7.1 billion to $7.2 billion.

The best performance this quarter came from the engine unit, where sales climbed 28% from the second quarter of 2010. Margins of 15.2% were above Wall Street estimates, due to strong sales of engine-timing systems in North America and China, and on continued growth in turbochargers.

But the company also showed good progress in fixing its problems in Europe, where the company has been working to restructure capacity and raise margins. Margins in the European drivetrain unit increased this quarter to 7.4%, from 6.6% in the first quarter.

After Borg Warner’s great fourth quarter of 2010, I’d recommended this stock in January with a target price of $82 a share by October 2011. The stock hit that price in July, just a bit ahead of schedule.
Borg Warner has been a member of my Jubak’s Picks portfolio since January 2011.

I think Borg Warner is on track to produce earnings of $5.50 a share in 2012, and that would take the stock up to my new target price, as of today: $98 a share by July 2012. That would be roughly a 27% gain from today’s price.

Full disclosure: I don’t own shares of any of the companies mentioned in this column in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund (JUBAX), may or may not now own positions in any stock mentioned in this column. The fund did own shares of Borg Warner as of the end of March. For a full list of the stocks in the fund as of the end of March, see the fund’s portfolio here

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