BorgWarner Down to Underperform

On January 22, we have downgraded the automotive powertrain products manufacturer BorgWarner Inc. ( BWA - Analyst Report ) to Underperform based on its lower revenues and pessimistic view on 2012 results.

Why the Downgrade?

Although BorgWarner’s earnings rose 3.5% to $1.19 per share (excluding non-recurring items) in the third quarter of the year, its revenues dipped 5% to $1.7 billion due to a 6% fall in light vehicle production in Europe. Operating income declined 3.4% to $192.0 million (excluding non-recurring items) in the quarter.

BorgWarner lowered its 2012 revenues and earnings guidance owing to the economic slowdown in Europe. For the year, the company anticipates annual sales growth between 0% and 1% compared with the prior guidance of 4% to 6%. The company also expects net earnings between $4.90 and $5.00 per share for the year, excluding special items, which is lower than the prior outlook of $5.05 to $5.25 per share.

Following the release of third quarter results, the Zacks Consensus Estimate for 2012 has remained unchanged at $4.96 per share. However, the Zacks Consensus Estimate for 2013 declined 1.3% to $5.28 in the same timeframe.

Cause for Concern

Apart from the weakening European market, where the company generates over half of its sales, we are worried about the strong competition faced by the company as path-breaking technologies are continuously developed by its peers, which could reduce demand for its products.

Further, BorgWarner has high concentration of sales to its major customers such as Volkswagen AG ( VLKAY ) and Ford Motor Co. ( F - Analyst Report ) . The company’s worldwide sales to Volkswagen and Ford constitute about 20% and 10% of total sales, respectively.

Other Stocks That are Worth a Look

While we prefer to avoid BorgWarner, other stocks from the same industry that are worth a look include Oshkosh Corporation ( OSK - Snapshot Report ) . This company carries a Zacks Rank #1 (Strong Buy).