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Why it's Better to Hold BorgWarner (BWA) in Your Portfolio?

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On May 29, Zacks Investment Research downgraded BorgWarner Inc. (BWA - Free Report) to a Zacks Rank #3 (Hold).

The company recorded adjusted earnings of 91 cents per share in the first quarter of 2017, higher than 80 cents per share in the year-ago quarter. Earnings also topped the Zacks Consensus Estimate of 84 cents.

Revenues rose 6.1% year over year to $2,407 million and beat the Zacks Consensus Estimate of $2,250 million.

The company reiterated its projection to generate net new business of $410–$590 million in 2017, $460–$670 million in 2018 and $500–$700 million in 2019. As a result, organic compound annual growth rate (CAGR) is estimated at 5–7% from 2016 through 2019. About 62% of the new net business in the 2016–2019 period is expected to stem from engine-related products, while the remaining 38% should be generated from drivetrain-related products. Asia, the Americas and Europe are expected to generate 40%, 39% and 21% of the new business, respectively, over three years. China (32%) and North America (25%) are anticipated to contribute to a major portion of growth.

BorgWarner’s healthy balance sheet and ample cash flows help it to return capital to its shareholders and undertake acquisitions. It is also poised to benefit from its various expansion programs including the ones in Asia and South America.

However, BorgWarner’s shares have underperformed the Zacks categorized Automotive-Original Equipment industry in the last six months. The company’s shares have rallied 15.1% during the period, whereas the industry has recorded a gain of 18.5%.

The company is affected by foreign currency translations and the impact of the sale of Remy light vehicle aftermarket business. The adverse impact of foreign currencies reduced its net sales by $111 million and net earnings by 5 cents per share in 2016. Also, a negative impact of around $310 million for full-year 2017 is expected from foreign currencies.

In second-quarter 2017, foreign currencies are likely to impact earnings by 5 cents per share. Moreover, foreign currencies are expected to have a negative impact of $115 million on net sales in the second quarter.

BorgWarner Inc. Price and Consensus

Stocks to Consider

Better-ranked companies in the auto space include Allison Transmission Holdings Inc. (ALSN - Free Report) , Ferrari N.V. (RACE - Free Report) and Dana Incorporated (DAN - Free Report) . All three sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Allison Transmission has an expected long-term growth rate of 11%.

Ferrari has an expected long-term growth rate of 14.1%.

Dana has an expected long-term growth rate of 3%.

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