Morgan Stanley Research reported this week on the North American International Auto Show in Detroit. Analysts were surprisingly pleased at the industry earnings outlook, despite poor U.S. and European economies. "The only things that rival the unseasonably mild temps and bright sunshine in Detroit are the positive outlooks from many of the companies here." Morgan Stanley commented on Borg Warner as standing out among the group, "The company with the highest Euro exposure in the group guided 10% above consensus. Who would've thunk it?"
Borg Warner Inc. (BWA, $72.53) is a global supplier of engineered automotive systems and components, primarily for powertrain applications. Their products are sold to virtually all global OEMs.
As I comment about Borg Warner today, the first thing to note is that the projected earnings from Wall Street were calculated before BWA gave analysts higher earnings guidance for the coming year. The former consensus estimate projections had BWA increasing earnings per share (EPS) 18% in 2012 and 21% in 2013. In addition, BWA is projecting record margins in fiscal 2012.
The stock carries a 2012 price earnings ratio (PE) of 13.9 before the coming earnings estimate revisions. As EPS estimates are revised upward, the PE adjusts downward, indicating a strong growth company with a PE appealing to a value investor, thus broadening the base of likely investors. BWA's low and high PE's during the last decade have been 7 and 24.
Today, Standard & Poor's assigned Borg Warner a "Medium" Qualitative Risk Assessment. "Our risk assessment reflects BWA's exposure to the cyclical and very competitive vehicle components market, its limited ability to raise prices, and rising exposure to developing markets, offset by our view of its strong product portfolio, technology focus and balance sheet."
BWA stock rose steadily prior to the 2008 Financial Meltdown, fell dramatically, completely recovered by 2010 and kept rising, reaching new highs in early 2011. At that point the stock established a new trading range and had a pullback with the weak stock market beginning August 2011.
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The stock has been trading $58-$81 for just over a year. With most good stocks pulling out of their lower Fall of 2011 trading ranges and heading back up, I expect BWA to head back towards last year's highs, then trade for a while in the $65-$81 range.
BWA is an attractive growth stock. This is not a stock for growth & income investors, because it pays no dividend, nor for investors who prefer low volatility. But any experienced growth stock investor could do well with BWA, and value investors as well. Try to hold out for a purchase price of $68 or $69.
A trader who bought around $65 and sold at $81 could make close to 25% gross profit. The opportunity to buy at $65 might not come until later this year, but traders generally have their eyes on a menu of stocks at various prices, and this is one to add to the list.
Crista Huff, Goodfellow, LLC
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