Eight years from now, pure electrics will make up between 2% and 3% of light-vehicle unit sales, predicts market researcher IHS Markit—a view that BorgWarner (ticker: BWA) backs, based on talks with car makers. Some 17% of cars will be hybrids, and for safety and cost reasons, they will mostly be what the industry calls mild hybrids, which save on fuel and emissions, but maintain a leading role for internal-combustion engines. The rest of light vehicles will be traditional gas guzzlers, or rather, gas sippers, with ever-smaller engines tweaked with power-boosting turbo systems and mileage-stretching features that, for example, shut off the engine at stop lights.
“We’re a propulsion company, not just a powertrain company,” CEO James Verrier told Barron’s Wednesday, after hosting an investor conference. “Powertrain” refers collectively to car components like the engine and transmission, which generate and transmit power. The term is sometimes applied to electric cars, but Verrier wants to make clear that however tomorrow’s cars are powered, BorgWarner will play a role. It’s important that he make that case, because shares that fetched over $60 two years ago now go for $34.14, having fallen on fears that an earnings decline last year was the beginning of the rise of electrics and the end for powertrain players. In fact, it was due to unrelated factors—more on those in a moment.
Earnings per share this year are expected to rebound to their 2014 level, which, in light of the stock’s decline, means that shares that sold for 19 times earnings then now go for just 11 times. Over the next few years, BorgWarner is expected to grow earnings per share at a double-digit pace. Barron’s made an ill-timed call early last year, recommending the stock at $55 (“BorgWarner Shares Could Roar Higher,” Jan. 3, 2015). But the current price looks unreasonably low. As investors regain confidence, expect the shares to rise more than 30% in the next year. The stock yields 1.5%.
LAST YEAR, BORGWARNER reported sales of just over $8 billion, a 3% decline, and profit of $646 million, down 6%, after a string of cuts to guidance. Two things that didn’t cause the decline were Volkswagen’s (VOW3.Germany) emissions-test cheating scandal and demand for electric cars, which are still much less than 1% of unit light-vehicle sales. One factor was a tumble in the euro, which made BorgWarner’s sales to turbo-happy European car makers less valuable in dollar terms. A second was weak demand for industrial vehicles. A third was a slowdown in China’s car market.
For the complete article please visit
Barron's
ABOUT
Dynamic Wealth Research was founded on the principle the world is changing at an ever-increasing pace. The greatest profit opportunities an investor will ever find are from massive, sweeping changes. Dynamic Wealth Research analyzes and closely follows these changes, keeps its readers on the leading edge of them, and shows you how to be best positioned these anxious, interesting, and ultimately profitable times.
