EPropulsion Shift And New Business Units Spark Optimism For Future Growth

Key Takeaways

• BorgWarner's strategic shift through restructuring and a new business unit structure aims to reduce costs and enhance operational efficiency.
  
• Emphasis on sustainability and technological innovation in propulsion systems is poised to open new market opportunities and strengthen the company's industry position.
  
• Strategic focus on specific markets and ePropulsion restructuring coupled with a cautious approach to M&A may limit BorgWarner's adaptability and long-term growth potential.

Catalysts

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

• BorgWarner's ongoing restructuring actions, particularly within its ePropulsion segment, indicate a strategic shift to reduce costs and adapt to current market dynamics, aiming for about $100 million in annual run rate cost savings by 2026. This initiative is expected to enhance net margins by lowering operational expenses and thereby potentially increasing profitability.
  
• The introduction of a new business unit structure designed to maximize cost synergies and enhance go-to-market global strategies indicates an operational efficiency improvement. These changes are likely to streamline operations and reduce redundancy and costs, positively impacting net margins and earnings.
  
• BorgWarner's focus on efficient capital deployment, including the repurchase of $300 million of its stock in the second half of 2024, suggests a confident outlook on its financial health and a shareholder value increase. This action could lead to earnings per share (EPS) growth by reducing the number of shares outstanding.
  
• The company's advancements in sustainability, including significant reductions in greenhouse gas emissions and engagement in supply chain management for Scope 3 emissions reduction, position BorgWarner favorably in terms of regulatory compliance and operational efficiency. This focus on sustainability can lead to cost savings and open up new market opportunities, potentially increasing revenue and improving net margins.
  
• BorgWarner's multiple new product awards across combustion, hybrid, and electric vehicles for both passenger and commercial sectors highlight its technological leadership and innovation. This diversified product portfolio can drive future growth in revenue by meeting the demand across a wide range of propulsion systems, enhancing the company's market position in the evolving automotive industry.

Assumptions

• Analysts are assuming BorgWarner's revenue will grow by 5.8% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 5.3% today to 0.1% in 3 years time.
• Analysts expect earnings to reach $1.1 billion (and earnings per share of $4.85) by about August 2027, up from $764.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.0x on those 2027 earnings, down from 10.1x today. This future PE is lower than the current PE for the US Auto Components industry at 19.8x.
• Analysts expect the number of shares outstanding to decline by 3.1% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 8.36%, as per the Simply Wall St company report.

Risks

• The reliance on specific geographic markets, such as China and North America, for the majority of ePropulsion restructuring might impact revenue and profitability if these markets face regulatory changes or economic downturns.
  
• The recognized need for ePropulsion restructuring indicates operational inefficiencies and potential shortfalls in the eProducts business line, which could affect overall margins if not effectively managed.
  
• The shift in propulsion mix dynamics presents a risk to BorgWarner's traditional ICE-focused portfolio despite efforts to outgrow the market in any propulsion scenario, potentially impacting long-term revenue growth.
  
• The necessity to adjust cost structures and carry out restructuring actions, specifically within the ePropulsion segment due to short-term sales challenges, suggests susceptibility to market volatilities that might impact net margins.
  
• The decision to focus more stringently on organic growth and be more prudent in M&A activities reflects a strategic shift that could risk limiting BorgWarner's ability to quickly adapt to technology shifts or market demands, possibly affecting long-term earnings potential.

Valuation

• The analysts have a consensus price target of $41.1 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 $17.0 billion, earnings will come to $1.1 billion, and it would be trading on a PE ratio of 10.0x, assuming you use a discount rate of 8.4%.
  
• Given the current share price of $33.81, the analyst's price target of $41.1 is 17.7% 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.