Embracing Asian Electric Vehicle Growth Drives Success Amid Global Challenges

Key Takeaways

• BorgWarner's operational efficiencies and cost controls are improving margins, enhancing financial performance and supporting earnings growth.
  
• Entry into Asian electric vehicle markets and capital allocation strategies highlight confidence in future earnings and effective cash management.
  
• Declining organic sales, market uncertainties, and reliance on eProducts challenge BorgWarner's revenue growth amid currency fluctuations and economic instability.

Catalysts

Provides solutions for combustion, hybrid, and electric vehicles worldwide.

• BorgWarner's strong operational performance and focus on cost controls are improving margins, which enhances net margins and overall financial performance.
  
• Growth opportunities in Asian electric vehicle markets, notably in China, Korea, and Japan, are anticipated to drive future revenue due to new product awards and expansions in these regions.
  
• Capital allocation strategies, including a $400 million stock repurchase, indicate confidence in future earnings growth and showcase effective cash management to enhance earnings per share (EPS).
  
• The company's strategic emphasis on propulsion efficiency, including advancements in both combustion and electric vehicle technologies, positions it to outgrow market production and potentially increase revenue.
  
• Current restructuring efforts and focus on operational efficiencies are set to translate into continued margin improvements, supporting earnings growth in upcoming quarters.

BorgWarner Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming BorgWarner's revenue will grow by 6.6% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 6.5% today to 6.3% in 3 years time.
• Analysts expect earnings to reach $1.1 billion (and earnings per share of $4.88) by about November 2027, up from $919.0 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $977 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.9x on those 2027 earnings, up from 8.3x today. This future PE is lower than the current PE for the US Auto Components industry at 20.0x.
• Analysts expect the number of shares outstanding to grow by 0.67% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.46%, as per the Simply Wall St company report.

BorgWarner Future Earnings Per Share Growth

Risks

• BorgWarner experienced a 5% decline in Q3 organic sales year-over-year, indicating potential challenges in maintaining or increasing future revenue streams.
  
• The company's future sales are projected to be impacted by anticipated declines in market production, which could hinder their ability to meet revenue and earnings targets.
  
• BorgWarner's reliance on generating significant growth from its eProducts may be challenged by slowing market momentum in the Western electric vehicle market, potentially affecting future revenue growth.
  
• The restructuring and incremental cost control benefits that contributed to current margins may not be sustainable over time, creating potential for future pressure on net margins.
  
• BorgWarner's exposure to fluctuations in foreign currency and continued economic uncertainty in key markets like China and Europe poses risks to their earnings stability.

Valuation

• The analysts have a consensus price target of $41.62 for BorgWarner based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $51.0, and the most bearish reporting a price target of just $32.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $17.2 billion, earnings will come to $1.1 billion, and it would be trading on a PE ratio of 10.9x, assuming you use a discount rate of 8.5%.
  
• Given the current share price of $34.81, the analyst's price target of $41.62 is 16.4% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.