The stock price of this narrow-moat auto-parts maker doesn't reflect the company's growth and margin prospects.
By Richard Hilgert | 09-08-16 | 04:12 PM | Email Article

Narrow-moat rated  BorgWarner  recently hosted an investor day at its research and development facility in Auburn Hills, Michigan. Revenue growth from innovation, the ability to commercialize new technologies, and higher average dollar content per vehicle as well as management’s focus on economic profit were highlighted. We think the company successfully argued that it should be viewed in the broader sense of supplying components and modules for propulsion systems rather than engine and driveline because of the expanding portfolio of BorgWarner products.

Richard Hilgert is a senior equity analyst for Morningstar.

Over the past several months, we have been telling investors about how BorgWarner benefits from expanding penetration of fuel saving, emissions reducing technologies that enable automakers to comply with increasingly more stringent clean air regulations as well as a recovery in European demand--a substantial regional market for BorgWarner. Since we highlighted BorgWarner stock in our January 2016 Select Report, “A Diesel Dilemma: Is the Demise of the Diesel Imminent or Exaggerated?” the share price has appreciated approximately 25%.

However, we believe the stock market still does not reflect the firm's growth and margin prospects. Management guidance points to a long-term revenue growth rate in the mid- to high-single-digits, and excluding the costs and effects of acquisition integration, the company also expects margin expansion from already impressive levels. In 2015, BorgWarner EBITDA margin was a very healthy 17.2% even though European auto demand (the region accounted for 54% of 2015 revenue) has been in recovery but still at historically lower levels. This 4-star rated stock currently trades at slightly more than a 30% discount to our $52 fair value estimate.

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Richard Hilgert does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.
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