Costs Holding BorgWarner Back

BorgWarner Inc. (BWA - Analyst Report) is expected to benefit from the growing demand for its strong technology-based product portfolio. About $1.95 billion of new powertrain business is expected between 2008 and 2010. The company has healthy financials with low debt and has taken further initiatives to maintain margins in the challenging North American industry environment.

However, due to high raw material costs and price concessions to automotive makers, we rate the shares a Hold, with a target of $50.00. Currently, shares of BWA are trading at 17.2x our 2008 EPS estimate of $2.95. Our cautious approach is reflected in our six-month target price of $50.00, which is derived from our 2008 EPS estimate, and a forward multiple of 16.9x.

BorgWarner's advances in turbocharger design, manufacturing and materials are expected to boost the growth of turbocharger and gasoline engines by 30% over the next five years. The company also expects strong diesel engine growth from by 2013.

The company has a remarkable line-up of innovative product launches. We expect benefits to accrue from the ramp-up of DualTronic, the dual clutch transmission (DCT) system, which improves fuel efficiency by 15%. The company is also developing a new DCT design for emerging markets and small car markets.

The company will invest about $125 million to increase its global passenger car turbocharger capacity by more than 3 million units over the next few years. The company looks to capitalize on growth opportunities in Asia. India and China are expected to account for 50% of the growth in the turbocharger business in the next 10 years, and BorgWarner ranks number two in both markets.

Read the full analyst report on BWA