Analysts Forecast Big Gain For Auto Stock

In Boca Raton, Florida an investment manager with the highly unusual name of Iii Capital Management manages $1.5 billion and has taken a meaningful stake in BorgWarner (NYSE:BWA), an automotive supplier.

A peek under the hood reveals what the money manager has uncovered that may pique investors’ interests too.

BorgWarner vs S&P 500

Over the past year, the S&P 500 rose by 20.0% but BorgWarner fell by 13.2%. That is not entirely a surprise when taking a closer look at the top line which has grown by a substantially lower amount this past year versus prior years.

In Q2 2021, the company blew away revenues by reporting annual growth of 163.5% whereas last quarter that number had slowed to just 12.3%.

Still, there is lots to like about the company that has positioned itself at the forefront of electrification. Early on, the team recognized the potential of electric and hybrid vehicle technology as a cornerstone for the future of transportation and invested in electric propulsion systems and battery management solutions that they subsequently commercialized successfully.

Over time, it has grown from being simply a component manufacturer to a technology leader, setting the pace for innovations in electric vehicle technology. For example, its product portfolio now is vast, encompassing electric motors, battery systems, power electronics, and thermal management systems that are essential components of EVs.

Its product breadth enables BorgWarner to cater to a broader spectrum of customer needs and insulates them from specific market downturns.  But perhaps its greatest asset lies in its supply chain relationships.

BorgWarner has a large network of relationships with major automakers around the world that ensure its offerings remain relevant and in-demand. Because of their collaborative nature, the team can gain early insights into new vehicle designs and emerging automotive technologies that allow them to proactively adapt product offerings.

These connections to major automakers also lead to more stable and predictable revenue streams. Given product development and production cycles are lengthy, the long-term nature of the contracts mitigates top line volatility risk associated with demand fluctuations.

They also span the globe so BorgWarner has access to a broad range of markets, including emerging economies where automotive growth rates are higher than in more established markets.

Furthermore, BorgWarner enjoys a competitive edge by collaborating with leading automakers where it has a view of the forefront of the industry and can take action relating to nascent trends in electrification and autonomous driving.

When you put all those ingredients into the mix, the company can secure new contracts as a result of its growing reputation, all of which help to support the top line. So what does the future hold?

BorgWarner Stock Forecast

According to 18 analysts, BorgWarner stock is forecast to rise by 24.8% to $44.84 per share.

Interestingly, a discounted cash flow analysis assesses the intrinsic worth of the firm to be $47 per share, representing closer to a 39.8% gain.

Shareholders can have more confidence in the prospects of the firm given that it’s already demonstrated an 11.6% return on invested capital and a 15.4% return on equity.

Not only that but it has an 8.3x price-to-earnings ratio that is even more attractive given that the firm has been profitable over the past twelve months.

Those strong earnings are also expected to remain highly supportive of the dividend yield, which now resides at 1.30%. That corresponds to an annualized payout of $0.44 per share. It appears highly sustainable, too, given that the payout ratio is quite low, sitting at just 19.9%.

The drawbacks of an investment in BorgWarner now are two-fold. On the one hand, analysts expect a sales decline this coming year and, in anticipation of that, it seems the share price has already sold off in a meaningful way, vastly underperforming the major market indices.

Still, with almost a billion in cash on the balance sheet against $3.6 billion in long-term debt, the company is well-funded to pursue its research and development initiatives, and at no immediate risk of running short of dry powder to finance them. If a liquidity crunch did materialize, it would substantially impact the firm’s R&D efforts as well as raising the prospect of a secondary, which in turn would dilute existing shareholders.

Is BorgWarner Stock a Buy?

It’s clear to see why Iii Capital Management took a notable stake in BorgWarner given its market leadership in niche segments like turbochargers and emissions systems has created a strategic advantage. By drilling down to focus on these areas, BorgWarner can innovate in ways that broader competitors do not and that in turn leads to more efficient, and reliable products which are valued by automakers.

As its brand and reputation grow, so too do automakers build trust seek it out for partnership opportunities. That in turn creates a barrier to new entrants taking share. Add to the mix the combination of technical know-how and expertise in scaling operations, and BorgWarner is growing its moat with each passing quarter.

The bottom line is BorgWarner stock is a Buy for the long-term, though technical traders may wish to wait for the share price to resume an uptrend before establishing a position.

For conservative investors who favor value plays, it’s hard to pass up the opportunity to take a stake in a firm with such strong earnings, solid cash flows, and significant upside according to both analysts and a discounted cash flow forecast analysis. Supporting the bullish thesis is the low price-to-earnings ratio under 10x, a high ROE and a high ROIC.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.