Is BorgWarner Stock A Buy?

BorgWarner Inc. (NYSE:BWA) is an auto manufacturer you may not know if you’re not a mechanic. It manufacturers and supplies automotive powertrain products, like manual and automatic transmissions, clutches, and four-wheel drive system components. It also makes ignition interlock devices.

Although its products are selling, is BorgWarner a Buy?

The mid-cap company has expanded its product offerings to include engines, thermal systems, and even turbocharges used in professional racing. It sells direct to OEMs, giving it long-term, predictable cash flow from big orders.

Still, the company’s market cap remained relatively muted in the aftermath of the 2020 market spike low. And lower trading volumes led to unstable pricing in the year prior. This has some investors wondering if the company can recapture its former high price levels from a few years ago.

How much gas does BorgWarner have left in its tank? Will it accelerate profits or pump the brakes on investors moving forward?

BorgWarner Leveraged Traction In Europe To Grow

Although it creates a wide range of OEM automotive parts, two created the successful company it is today. It goes back to the 2000s, when it created a dual-clutch transmission. American drivers are used to automatic transmissions, but purists love the control of a manual clutch.

When you switch gears on a car, it’s not unlike switching gears on a bicycle. You’re moving to different gears to create more power and accelerate better at different speeds. A five-speed clutch has five gears it can switch between, but that’s just in a single-clutch system.

Two types of transmissions grew in popularity in the 2000s – constantly variable transmission (CVT) and dual-clutch transmission. If you’re not a car person, think of it like the HDDVD/Blu-Ray wars where two competing technologies popped up. Both do what their names imply.

Nissan is infamous for using CVT drivetrains, which created an expensive recall in the 2010s. Meanwhile, BorgWarner’s dual-clutch transmissions proved efficient.

Instead of changing gears on the fly, it follows the same method but with two clutches. So, the computer switches between gears to make a much smoother transition.

It gained traction in Europe, and the company used the revenue from its success to fund turbochargers. From professional race cars to consumer vehicles, these high-performance turbos compress air and increase fuel ratios to push your engine harder and faster.

Its products are a hit, but does that make BWA stock a good investment?

Is BorgWarner Stock A Buy?

BorgWarner is rated a Buy by 7 Wall Street analysts and a hold by 9 while just one Sell rating has been issued. Which of the analysts is correct? A discounted cash flow analysis of BWA reveals that the intrinsic value is $45.71 per share.

The company is a component of the S&P 500, so you may already be invested in it through your retirement plan.

BorgWarner pays a consistent quarterly dividend that was raised to $0.68 per year in 2017. Although remaining stagnant, it paid in all four quarters following the pandemic market crash.

Its third quarter 2020 earnings release showed $284 million in operating income off $2.5 billion in net sales. This is an increase over Q3 2019 and shows a strong recovery in automotive manufacturing. The company had $481 million in net cash with $390 million in free cash flow by the holiday season.

Because it manufactures OEM parts, the company has relatively stable revenues, but that could change over the next decade.

Could Electric Vehicles Hurt BWA Share Price?

The biggest problem in the transmission market is electric vehicles. Driven by Tesla’s meteoric rise over the past decade, many investors believe we’re heading for an all-electric future.

EVs don’t use the same type of transmission as combustion engines. In fact, the entire engine is engineered different.

And manufacturers don’t know what the automotive market will look like in the 2020s. On one hand, used car sales are up. Gig economy services like DoorDash and Uber (UBER) give people available income streams using their vehicles. While they can’t afford new ones, they must service old ones.

While higher-income families can switch to electric, lower income brackets are likely to stay with what’s available until older gas vehicles become more expensive to own and maintain than their electric counterparts.

The industry is already moving down that road, and it makes the component manufacturing industry anyone’s ball game.

EVs Are Not The Only Threat To BorgWarner Stock

BorgWarner isn’t alone in manufacturing parts for major automotive brands. Magna International (MGA), Linamar, Aisin Group, Valeo, and Dana are among the competitors working in the same industry.

It’s been over a decade since dual-clutch transmissions hit the market. It needs to continue innovating while following the market.

In many ways, BorgWarner is like Callahan Auto Parts in the movie Tommy Boy. It took two salesmen fighting for big contracts to keep the plant in business.

Should it fail to keep up with AI-powered automation, electric vehicles, and other technologies, BorgWarner could find itself a casualty of the fourth industrial revolution. But until then, it has a solid reputation and market position that should carry investors for at least a few more years.

Is BorgWarner Stock A Buy? The Bottom Line

BorgWarner is an American automotive parts manufacturer that creates engines, powertrains, and more. Its parts are often used as OEM by top brands, and it grew a solid reputation in Europe after proving the efficiency of its dual-clutch transmissions in BMWs.

Now it creates a series of performance parts for both professional race cars and consumer vehicles. And it has plenty of cash on hand from its operations. This helped the company successfully navigate a rough 2020 economy and recover to formerly elevated share price levels.

Its biggest problem is transmissions work different in EVs, and they are becoming more popular.

---

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.