BorgWarner Delivers Strong Content Growth, With Major BEV Acceleration On The Way

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It wasn’t truthful agelong agone that penning astir conveyance electrification brought retired nan “it’ll ne'er hap … it’s conscionable a fad (or fraud)” naysayers, but I’ve noticed that arsenic EV accumulation rates climb, those commenters look to person slunk into nan shadows. Likewise, the Street seems to beryllium getting much and much comfortable pinch nan communicative astatine BorgWarner (NYSE:BWA), a communicative wherever leverage to electrification is decidedly crucial, but besides wherever precocious technologies for accepted powertrains still matter.

BWA banal has climbed almost 25% since my past update, enjoying a rally that has seen beardown value capacity for different EV-heavy names for illustration Aptiv (APTV), Faurecia (OTCPK:FURCF), Valeo (OTCPK:VLEEY), and Vitesco (OTCPK:VTSCY), while suppliers pinch little electrification leverage for illustration Autoliv (ALV), Gentex (GNTX), and Lear (LEA) person done okay comparative to nan broader market, but not astir arsenic good arsenic nan electrified names.

I proceed to beryllium very bullish connected BorgWarner’s future. There are still valid concerns astir nan gait of nan ICE-to-BEV modulation and what margins will look for illustration for BEV suppliers, but I judge BorgWarner is well-placed to look arsenic a victor connected nan different broadside of this modulation pinch a beardown portfolio of electronics, motor, and ancillary merchandise offerings.

Content Growth Drives A Great Fourth Quarter

BorgWarner grew good successful excess of underlying world conveyance accumulation successful nan 4th quarter, and hit nan Street crossed astir of nan statement items that matter. Guidance for FY 2023 was a small soft, but BorgWarner does person a estimation for starting disconnected pinch comparatively blimpish guidance.

Revenue roseate 12% arsenic reported, beating by astir 5% (or $0.06/share), but posted 21% integrated maturation that was acold successful excess of nan sub-2% world conveyance accumulation maturation complaint successful nan quarter. I property this to BorgWarner’s beardown leverage to precocious contented successful powerfulness (turbochargers, timing, gasoline nonstop injection), arsenic good arsenic emissions (like EGR) and transmissions. While it’s very overmuch existent that BEV is nan “sizzle” successful nan car sector, it’s besides existent that conventionally-powered cars transportation rather a spot much contented these days meant to heighten performance, trim emissions, and amended thrust quality.

Gross separator declined 20bp yoy but improved 40bp qoq to 20.3%, arsenic nan institution continues to spot inflationary costs pressures but is getting a small much accustomed to dealing pinch them. Operating income roseate 9%, beating by astir 9%, pinch a amended than expected operating separator (down 50bp yoy and 180bp qoq to 10.4%) adding different $0.02/share comparative to sell-side expectations. Taxes besides played into nan hit versus sell-side expectations, and full-year free rate travel was comfortably up of my expectations ($846M versus $740M).

Looking astatine nan business units, Air Management grew gross astatine an 18% integrated rate, missing by astir 2%, while profits roseate 6% (margin down 60bp to 15.5%) and hit by 10%. The ePropulsion and Drivetrain business grew gross astatine a 29% integrated rate, beating by almost 10%, while profits roseate 20% (margin up 10bp to 9.3%) and hit by 46%. Revenue for Fuel Injection roseate 18% successful integrated terms, beating by 9%, but profits declined 26% (margin down 460bp to 9.2%), missing by 22%. Aftermarket gross roseate 15% organically, beating by 17%, pinch profits up 39% (margin up 350bp to 17.5%), beating by 37%.

Guidance Is Starting To Suggest A Slower, Longer Auto Recovery But With Strong BEV Build Rates

The December reporting rhythm isn’t complete yet, but there’s decidedly much accusation successful manus now astir underlying marketplace trends successful nan car space, and I’m having to revise immoderate of my expectations lower. While mid-single-digit maturation successful North American car builds still looks possible, weaker economical trends successful nan EU and China look much apt to person a bigger effect than I’d antecedently assumed.

Underlining that point, BorgWarner is only looking for astir 0% to 3% conveyance portion maturation successful 2023, pinch ray vehicles up a small complete 1% astatine nan midpoint (with neither nan EU nor China expected to turn beyond 2%). This whitethorn beryllium conservative, but I person to constituent retired that suppliers for illustration BorgWarner were much cautious than nan Street and different third-party information sources connected build rates for 2022 and they proved to beryllium correct (funny really nan superior suppliers to an manufacture look to cognize much astir that industry, isn’t it?).

Even pinch humble underlying measurement growth, contented growth, peculiarly successful BEVs, will beryllium a powerful tailwind for nan institution successful 2023. Management’s 7% to 12% integrated maturation target is not only comfortably supra nan marketplace maturation complaint (8% astatine nan midpoint), but besides astir 2% to 3% higher than wherever nan Street was before.

Electrification continues to beryllium a awesome force, pinch guidance expecting a 100% summation successful EV-related gross successful 2023 and pinch EV-related income expected to thrust astir two-thirds of growth. I judge BorgWarner guidance whitethorn really beryllium blimpish present arsenic well, arsenic I expect underlying BEV accumulation to double and I deliberation contented maturation should let above-production maturation for BorgWarner. Management made further advancement toward its extremity of $4.5B successful BEV income successful 2025 (a $300M sequential summation to $4.3B), and gave guidance for breakeven results present successful precocious '23/early '24.

It wasn’t each bully news, though, arsenic management’s operating income guideline was astir 2% beneath nan Street, pinch elevated input costs continuing to unit margins (as good arsenic ongoing investments into EV exertion and EV merchandise ramp costs). Free rate travel was besides guided weaker than I’d expected, pinch margins accounting for immoderate of that and costs related to nan institution break-up accounting for a batch of nan rest.

The Outlook

The biggest changes successful my outlook for BorgWarner are macro-driven – I’m toning down my expectations for car assemblage maturation successful 2023, but besides expecting amended results successful 2024 arsenic nan betterment stretches retired a small further.

As acold arsenic nan BEV broadside of nan equation goes, contempt immoderate automakers slowing their motorboat plans and others experiencing immoderate first challenges (like Ford (F), for 1 example), nan business continues to ramp nicely. I proceed to judge that expectations of in-sourcing are inflated; car OEMs that person elected to spell it unsocial are already uncovering that electrification isn’t easy, and I deliberation galore would-be in-sourcers will yet go customers of starring suppliers for illustration BorgWarner, Faurecia, Valeo, and Vitesco.

I haven’t changed my gross numbers each that overmuch (up 1% successful FY’23 successful FY’24, up 2% successful FY’25) and I’m still expecting semipermanent maturation successful nan 5% to 6% range, arsenic BorgWarner remains attractively leveraged to increasing ratio and emissions contented connected accepted powertrains and beardown measurement maturation successful EV production.

I’ve trim backmost my separator assumptions successful ray of guidance guidance, pinch my operating separator estimates down 50bp successful FY’23 and 100bp successful FY’24. My EBITDA separator assumptions besides return a hit, down 45bp successful FY’23 and 100bp successful FY’24, but I whitethorn beryllium taking excessively cautious of a trim now. I’m still looking for semipermanent FCF margins successful nan 6%s, driving FCF maturation adjacent to 7%.

Between discounted rate travel and EBITDA margin-driven EV/revenue, I judge BorgWarner remains undervalued. Between nan 2 methodologies, I get a adjacent worth scope successful nan low-to-mid-$60s, good supra nan low-$50s mean target value for nan Street correct now.

The Bottom Line

I expect that BorgWarner will proceed to person skeptics arsenic EV projects ramp up and analysts spot nan contented maturation and margins that electrification will yet nutrient for BorgWarner. I’m besides still bullish connected nan divided of BorgWarner and Phinia. I wouldn’t beryllium amazed if EV-strong suppliers retrace a spot of these caller gains, but I’d see that an opportunity to adhd if you didn’t already person vulnerability to nan space.

Editor's Note: This article discusses 1 aliases much securities that do not waste and acquisition connected a awesome U.S. exchange. Please beryllium alert of nan risks associated pinch these stocks.

Stephen Simpson is simply a freelance financial writer and investor. Spent adjacent to 15 years connected nan Street (sell-side, buy-side, equities, bonds); now a semi-retired raccoon rancher. That past portion isn't wholly true. Probably.