BorgWarner Surpasses Market Growth with Strong Third Quarter Performance
Global leader in clean and efficient technology solutions, BorgWarner Inc. (BWA), demonstrated robust performance in the third quarter of 2024, surpassing $3.4 billion in organic sales. Despite a 5% decline year-over-year, the company managed to outperform a 6% decreasing market. BorgWarner's adjusted operating margin rose to 10.1%, with earnings per share (EPS) reaching $1.09. The company also announced the completion of a $400 million share buyback program and provided a positive outlook for the year-end, expecting sales to be between $14.0 billion and $14.2 billion, with adjusted EPS projected between $4.15 and $4.30.
Key Highlights:
- Organic sales exceeded $3.4 billion in the third quarter, outperforming the 6% market decline despite a 5% year-over-year decrease.
- Adjusted operating margin increased to 10.1%, representing a 50 basis point improvement from the previous year.
- EPS rose to $1.09, an increase of $0.11 compared to the previous year.
- $400 million share buyback plan completed.
- New product orders include transfer cases for a North American OEM and high-voltage coolant heaters in Asia.
- 2024 sales forecast ranges from $14.0 billion to $14.2 billion, with adjusted EPS between $4.15 and $4.30.
- Free cash flow increased to $201 million, up $165 million from the previous year.
- Battery segment sales grew by 36%, aiming to reach breakeven as scale increases.
Company Outlook: The sales forecast for 2024 has been revised down to between $14.0 billion and $14.2 billion due to low market production and slight declines in product sales. The year-end margin expectation was raised to 9.8%-10.0%. Adjusted EPS estimates for diluted shares have been increased to $4.15-$4.30, reflecting a 4% increase over previous expectations. Free cash flow, projected between $475 million and $575 million, is largely planned to be utilized for share buybacks and dividends.
Negative Points: The 2024 sales outlook has been lowered compared to previous estimates, reflecting low market production and product sales. Light-vehicle production is expected to decline between 3% and 3.5% for the year, with significant declines anticipated in North America and Europe. The 2024 growth outlook has been adjusted to reflect market performance being 200 to 300 basis points above previous forecasts.
Positive Points: The company has shown a growth that is 270 basis points above the market year-to-date. The battery business experienced a 36% increase in sales, primarily driven by new supply in Europe. BorgWarner's competitive advantages in the commercial vehicle battery market are expected to support growth in the mid-teens.
Shortcomings: The Eldor acquisition contributed $9 million in sales but had a $14 million negative impact on operating income. Concerns exist regarding potential refunds from OEMs due to EV program cancellations, though these are assessed on a case-by-case basis.
Q&A Highlights: The company is adapting its production processes for electrification and managing costs effectively. Structural cost reductions are expected to range between $20 million and $30 million this year, with a target of $100 million by 2026. Advanced hybrid powertrains will utilize products from both turbo and thermal segments, indicating balanced demand. The company remains cautious regarding order momentum ahead of the U.S. elections and potential regulatory changes.
The third-quarter earnings discussion led by BorgWarner's CEO Frédéric Lissalde and CFO Patrick Nolan demonstrated the company's resilience in a challenging market. With strategic focus on cost management, new product orders, and strong performance in the battery segment, BorgWarner appears ready to maintain its profitability and sustain market performance in the upcoming fiscal year.
InvestingPro Forecasts: BorgWarner's resilient performance in a challenging market is further illuminated by InvestingPro's forecasts. The company's ability to maintain profitability is reflected in an attractive P/E ratio of 10.84, with a decline to 8.36 over the last twelve months projected for the second quarter of 2024. This valuation suggests that the market undervalues BorgWarner's earnings potential, particularly when considering its performance exceeding market expectations and its strategic positioning within the evolving automotive industry.
InvestingPro tips highlight BorgWarner's financial stability and shareholder-friendly practices. The company has demonstrated a commitment to creating shareholder value by maintaining dividend payments for 12 consecutive years, even while managing industry transitions. This aligns with the company’s recent completion of a $400 million share buyback program and plans for utilizing significant free cash flow for buybacks and dividends.
Moreover, BorgWarner's liquid assets exceed its short-term liabilities, indicating a strong balance sheet that supports future growth initiatives, particularly in the rapidly expanding battery and electrification segments. This financial flexibility remains crucial as the company continues to adapt its production processes for electrification and manage costs effectively.
However, investors should note that five analysts have downwardly revised earnings forecasts for the coming period, which may reflect caution regarding market production and potential regulatory changes mentioned during the earnings discussion. Nonetheless, BorgWarner’s ability to perform 270 basis points above the market year-to-date illustrates its resilience against industry challenges.
For readers wishing to conduct a deeper analysis of BorgWarner's financial health and future prospects, InvestingPro offers eight additional tips that may prove valuable for investment decisions.