BorgWarner’s (BWA - Free Report) near-term earnings and revenues could take a hit, thanks to the coronavirus outbreak. For full-year 2020, net sales are expected in the range of $8-$8.4 billion. This suggests a year-over-year decrease of 16% in organic sales to 20%. The company — a global leader in clean and efficient technology solutions required for combustion, hybrid as well as electric vehicles — expects a decline in light-vehicle production across all major markets served, which is likely to dent its top line. Unfavorable foreign currency translations and high R&D expenses are likely to dent margins.
Nonetheless, if you look beyond the near-term headwinds, BorgWarner may be the growth vehicle that your portfolio needs. Let’s explore why this Zacks Rank #3 (Hold) stock could make an attractive long-term pick. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Delphi Buyout is a Major Catalyst
BorgWarner’s planned buyout of Delphi Technologies (DLPH - Free Report) will further strengthen its propulsion leadership. The company is on track to close the acquisition by year-end. The combined entity would offer flexibilities across combustion, hybrid and electric propulsion lines, in accordance with BorgWarner's evolution toward the future propulsion industry and transition to electric vehicles. It will achieve cost synergies of approximately $125 million by 2023, primarily due to SG&A as well as procurement savings.
Electrification Efforts to Buoy Prospects
As the global auto industry is evolving to meet increasingly stringent emissions, BorgWarner is likely to benefit from accelerating vehicle electrification. In the long term, it expects that hybrid and electric technologies will be major revenue drivers. Electrification programs are likely to drive the company’s backlog. For 2020, the firm expects backlog in the range of $580-$730 million. Further, between 2020 and 2023, backlog is expected to be $2.5-$2.63 billion. With a diverse product range, it expects new business gains for products that cater to hybrid and electric vehicles by 2023. Region wise, it expects 20% backlog in the Americas, 10% in Europe and 70% in Asia. Recently, BorgWarner announced a partnership with Ford (F - Free Report) to build the integrated drive module for the latter’s all electric Mustang Mach-E.
Turbochargers to Drive Top-Line Growth
Turbocharger is the firm’s biggest product group that constitutes roughly 28% of sales.Since turbochargers help auto engines to remain in compliance with the tough emission standards, the demand for turbocharged engines is increasing. Notably, Garrett Motion (GTX - Free Report) is one of the leading suppliers of turbochargers and the closest competitor of BorgWarner in the turbocharger business. Garrett’s recent financial weakness and elevated leverage open a window of opportunity for BorgWarner to notch more contracts in the turbocharger space, as any automaker would certainly consider the financial stability of the company it is going to award the contract to.
In addition to turbochargers, BorgWarner’s timing products are also a primary growth driver. The timing system, which comes with one of the key technologies namely VCT, results in improved fuel economy and reduced emissions. High sales of turbochargers and timing products are likely to drive the firm’s top line.
Healthy Financials Boost Optimism
As of Jun 30, 2020, BorgWarner had $2,003 million in cash, up from $832 million on Dec 31, 2019. Long-term debt was $2,762 million, representing leverage of around 36.7%, lower than the industry’s 51.6%. Low leverage and a solid liquidity position will allow the company to tap onto growth opportunities. It also fares well in the cash flow parameter. BorgWarner’s FCF totaled $700 million in 2019. While 2020 cash flows will decline from the last year’s levels amid the coronavirus crisis, its improving forecast is generating optimism. BorgWarner expects to generate FCF within $300-$400 million in 2020, up from the prior projection of $100-$300 million. Full-year operating cash flow is expected in the range of $700-$850 million, up from the prior guidance of $530-$780 million. Given the various tailwinds surrounding the firm, BorgWarner’s cash flows are likely to witness growth in the coming years.
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