New eMotor Partnerships In China Will Diversify Products And Strengthen Future Position

Key Takeaways

• BorgWarner's strategic investments and focus on new products are poised to enhance market share and profitability, driving long-term growth.
  
• Emphasis on cost control, cash flow, and partnerships, especially in China, positions BorgWarner for sustainable revenue and product diversification.
  
• Declining industry volumes, exchange rate headwinds, and BEV adoption delays threaten BorgWarner's revenue growth and future profitability amid industry turbulence.

Catalysts

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

• BorgWarner's focus on new product awards for both foundational and eProducts is expected to support long-term profitable growth, positively impacting future revenue and market share.
  
• The company plans to outgrow industry production by leveraging core competencies in both fuel efficiency for combustion vehicles and electron efficiency for hybrids and BEVs, which should benefit revenue growth.
  
• BorgWarner's strategy to build on its existing product portfolio through both organic and inorganic investments aims to expand market share, potentially increasing earnings and net margin.
  
• The company's strong focus on maintaining financial discipline, cost control, and generating strong cash flow should help support sustainable net margins and free cash flow generation.
  
• Expansion of partnerships and securing awards for eMotors and transfer cases, particularly in the Chinese market, signals potential revenue growth and product diversification aligned with regional propulsion trends.

BorgWarner Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming BorgWarner's revenue will grow by 3.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.6% today to 6.9% in 3 years time.
• Analysts expect earnings to reach $1.1 billion (and earnings per share of $4.85) by about March 2028, up from $367.0 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $1.2 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 8.8x on those 2028 earnings, down from 17.7x today. This future PE is lower than the current PE for the US Auto Components industry at 15.8x.
• 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 8.62%, as per the Simply Wall St company report.

BorgWarner Future Earnings Per Share Growth

Risks

• BorgWarner's revenue growth may be pressured by declining global industry volumes and tariff implications, which could affect future sales and market position.
  
• The delay in battery electric vehicle (BEV) adoption and program cancellations, particularly in the Western world, could lead to lower than expected revenues from their eProducts segment.
  
• Exchange rate fluctuations, specified as a $410 million sales headwind, may negatively impact revenue and profitability by affecting sales figures and operating margins.
  
• BorgWarner reported significant goodwill and fixed asset impairment charges due to lower expected cash flows from certain business units; this might reflect longer-term challenges that could constrain future profitability and net margins.
  
• Despite intentions to make organic and inorganic investments, the current industry turbulence and pressures on cash flow might limit BorgWarner's ability to effectively execute growth initiatives and impact their earnings potential.

Valuation

• The analysts have a consensus price target of $37.653 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 $46.0, and the most bearish reporting a price target of just $31.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $15.4 billion, earnings will come to $1.1 billion, and it would be trading on a PE ratio of 8.8x, assuming you use a discount rate of 8.6%.
• Given the current share price of $29.5, the analyst price target of $37.65 is 21.7% 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.