North American Battery Consolidation And Hybrid Awards Will Shape Tomorrow

Key Takeaways

• Strategic focus on eProducts and restructuring is driving market share gains and profitability through efficient cost management and improved margins.
  
• Exiting non-core businesses and securing new product awards in hybrid vehicles indicate strong future revenue streams and enhanced operational efficiency.
  
• Exiting the charging business and consolidating battery systems reflect struggles with growth and demand, impacting future revenue, costs, and market projections amidst tariffs and supply risks.

Catalysts

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

• BorgWarner's continued growth in eProducts, with a 47% increase in light vehicle eProduct sales, positions the company to significantly outpace the market. This is likely to drive revenue growth and expand market share.
  
• The consolidation of battery system capacity in North America to improve cost structure aligns with better market dynamics, which is expected to enhance net margins and improve long-term profitability by saving approximately $20 million annually by 2026.
  
• Securing multiple new product awards, particularly in the hybrid vehicle segment with major OEMs, which are set to launch in the coming years, indicates strong future revenue streams and supports long-term growth.
  
• Exiting the non-core and loss-generating charging business is anticipated to improve operating income by $15 million, positively impacting overall earnings.
  
• Continued focus on cost controls and incremental margin improvements from restructuring and product focus are expected to support margin expansion and stronger EPS growth in future quarters.

BorgWarner Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming BorgWarner's revenue will grow by 2.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.6% today to 6.7% in 3 years time.
• Analysts expect earnings to reach $1.0 billion (and earnings per share of $4.66) by about May 2028, up from $367.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $1.2 billion in earnings, and the most bearish expecting $889.5 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 8.5x on those 2028 earnings, down from 17.4x today. This future PE is lower than the current PE for the US Auto Components industry at 15.9x.
• Analysts expect the number of shares outstanding to decline by 4.02% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.13%, as per the Simply Wall St company report.

BorgWarner Future Earnings Per Share Growth

Risks

• The decision to exit the charging business due to an unanticipated growth rate and high competition might reflect challenges in achieving scale, potentially impacting future revenue and returns on investment.
  
• Portfolio consolidation actions in the North American battery systems business were driven by lower demand than expected, which could affect revenue projections and near-term earnings until market adjustments are realized.
  
• The tariff issues, despite mitigation efforts, could result in higher costs impacting revenue and margins, as negotiations for recovery are ongoing and may not be immediately realized.
  
• The weaker demand outlook for the North American market due to macroeconomic and tariff-related uncertainties poses a risk to revenue growth, affecting the overall financial outlook if the projected declines in production occur.
  
• Continued reliance on materials like rare earths, which face supply chain risks and potential future tariffs, could affect the cost structure and margins for light vehicle eProducts.

Valuation

• The analysts have a consensus price target of $35.757 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 $42.0, and the most bearish reporting a price target of just $29.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $15.2 billion, earnings will come to $1.0 billion, and it would be trading on a PE ratio of 8.5x, assuming you use a discount rate of 8.1%.
  
• Given the current share price of $29.0, the analyst price target of $35.76 is 18.9% 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.