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On Mar 25, we upgraded BorgWarner Inc. (BWA - Analyst Report) to Neutral based on its advances in technologies and promising sales guidance. However, we are disappointed about its lower quarterly profits and concerned about the pricing pressure from OEMs and strong competition.

Why the Upgrade?

On Feb 14, BorgWarner posted a 2.5% decrease in profits to $1.16 per share (excluding non-recurring items) in the fourth quarter of 2012 from $1.19 in the same quarter of 2011. However, EPS in the quarter surpassed the Zacks Consensus Estimate by 4 cents. Revenues dipped 3.1% to $1.72 billion, but were ahead of the Zacks Consensus Estimate of $1.69 billion.

Following the release of the fourth quarter results, the Zacks Consensus Estimate for 2013 increased 0.8% to $5.31 per share. Meanwhile, the Zacks Consensus Estimate for 2014 increased 0.6% to $6.32 per share. Currently, BorgWarner maintains a Zacks Rank #3 (Hold).

BorgWarner expects annual sales to rise 2% to 6% in 2013 compared with 2012. Excluding the impact of 2012 dispositions, net sales are expected to improve 3% to 7%.

BorgWarner’s advanced design and fuel efficient technologies will boost its results. The company expects 80% of its business to come from engine-related products including turbochargers, ignition systems, emissions products, engine timing systems, variable cam timing modules and thermal systems. The remaining 20% will be generated from drivetrain-related products including the fuel-efficient DualTronic transmission technology, traditional automatic transmission and all-wheel drive technologies.

However, we are worried about the strong competition faced by BorgWarner as the path-breaking technologies are developed by its peers, which could reduce demand for its products. In addition, BorgWarner faces continuous pricing pressure from OEMs to reduce raw material costs.

Other Stocks to Look For

Few stocks that are performing well in the industry where BorgWarner operates include Gentherm Incorporated (THRM - Snapshot Report), STRATTEC Security Corporation (STRT - Snapshot Report) and Denso Corp. (DNZOY). All these companies carry a Zacks Rank #1 (Strong Buy).

 

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