BorgWarner: Turbo Turnaround?
09/09/2016 7:00 am EST
Our latest recommendation supplies major automobile makers with engine and power train systems, including turbochargers, ignition and cooling systems and all-wheel-drive technologies, explains George Putnam, editor of The Turnaround Letter.
Formed in 1928 from the combination of several component makers, BorgWarner (BWA) is widely recognized as a well-managed, high-quality industry leader.
It has strong market positions in product categories that are critical to improving engine power and efficiency. Turbochargers are the largest segment at about 31% of sales.
While BorgWarner has produced healthy sales and earnings growth over the past five years, its stock price has gone nowhere.
Growing recognition of the value of its technologies has boosted sales by 41% and profits by 62% since.
Investors, however, are concerned about a laundry list of issues: potential recession in Europe (~50% of sales), demand in China, a significant recent acquisition, ongoing dollar strength and the uncertain outlook for 15% customer Volkswagen.
BorgWarner is a company that doesn’t need a turnaround but is valued as if it does. Its shares are among the cheapest in the market.
We find it remarkable that a company with this degree of proprietary leadership in critical auto segments, with solid financials and growing revenue, sells at only 10.4x this year’s earnings.
The company has a relatively low level of debt, will likely produce over $400 million of free cash flow this year and is growing its organic revenues at a 4% annual rate.
BorgWarner’s culture positions it to continue to innovate in leading-edge technologies where competition is thin. For example, it is beginning to win important contracts for hybrid/electric vehicles.
We think the wheels will keep rolling with this high-quality company, and when investors recognize that, the stock price should move up nicely.
By George Putnam, Editor of The Turnaround Letter