BorgWarner: More Growth To Come

Summary

• BorgWarner showed some very positive results in 2016.
• The company expects 2017 to be another excellent year and foresees decent growth.
• We look at the company's growth potential to see if we may believe them.

BorgWarner (NYSE:BWA) has always been a decent stock. Ever since its IPO in 1993, the stock has been growing at an average return of 28.75% p.a. Only just recently in 2016, the company acquired Remy, a manufacturer of starters, alternators and hybrid technologies. At the end of fiscal year 2016 the company grew its total revenue with 13%. We believe that this is just the start of BorgWarner’s chapter of growth, as we take a look at what’s next for the company.

BWA data by YCharts

In its 2017 guidance the company foresees an organic revenue growth of 3.5% to 6%. In its Q1 2017 report, the company even upped net earnings expectations to between $3.5 and $3.6 per share, as a result of a lower tax rate assumption. All these numbers show expectations of very strong growth, and display an ambitious company. But can we believe BorgWarner when it says to increase in value this much, or is this just an over-estimation? We believe it’s true.

There are several indicators that lead us to believe that BorgWarner will be able to keep up with these strong growth expectations. Firstly, there is the company’s balanced product portfolio. This might seem irrelevant, but it actually is really important in a changing market-environment. BorgWarner states that it is specialized in automotive components that allow for propulsion, as the need for propulsion is one that every car-manufacturer faces. BorgWarner makes sure that it is active in all categories of cars: classic combustion, electric and hybrid. Currently the market demand for combustion technology remains very strong, but in the future the company plans to expand more towards hybrid and electric technologies, as this is the trend.

In 2016, combustion still held up the majority of sales (96.7%). All the while Hybrid and Electric only made up 3.3% of sales. In 7 years, BorgWarner expects the combustion segment to drop in revenue down to 81%, while Electric and Hybrid are expected to grow to respectively 16.8% and 2.2%. This is matches the current market trend. As soon as the market is ready and the time comes, BorgWarner will easily be able to shift its focus on an increasingly larger proportion of green vehicles, i.e. hybrids and electric.

But what about the financials then? Will the company be able to keep up with its competitive environment? When looking at the company's first quarter's results it definitely seems so. In Q1 2017 BorgWarner's revenue grew 6.1% and net income went up more than 15%. The company has an excellent operational margin that has been steadily growing in the last decade. Only in 2016 operating margins fell back 0.9% due to the takeover of Remy.

As far as debt goes, the company also seems to hold its grounds. The company has about $2 billion in long-term debt, and equally as much in short-term liabilities. Most of these liabilities are covered by equity, which is at approximately $3.5 billion. This results in a debt/equity of 1.61, which is manageable.

All these factors lead us to believe that BorgWarner is a strong company. It has the strategy, the products and the financials to agree with this statement. Operating margins keep increasing, the company is expanding and is ready for a shift from old technologies to newer green technologies. BorgWarner expects a strong growth for 2017, and we believe so too.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.