The market has been a bit shaky this week, as concerns about emerging markets and decreasing oil demand have put investors on edge, even as U.S. economic data and earnings information continues to come in strong and healthy. The market has dropped in five of the last six days after testing the all-time high levels all three major indices set in late January of this year. Trade tensions continue to add to that sense of uncertainty. While a smart investor won’t automatically dismiss the week’s decline as just another pullback, he also won’t ignore some of the opportunities that are coming about as a result.
The automotive industry has been coming under quite a bit of pressure, with all “Big Three” automakers down for the year, as rising oil prices have increased costs and narrowed margins, and trade tensions and tariffs on steel, aluminum and autos themselves have added to the uncertainty about the industry. That volatility has rippled to the Auto Components industry as well, with stocks like Magna International (MGA), Lear Corporation (LEA), and Borg Warner Inc. (BWA) have all reversed impressive upward trends since the beginning of the year. BWA in particular is very interesting; as of this writing, it is down about 24% since early January of this year, but has begun to show signs of consolidation in the $44 to $46 price area. Could the time be right to think about this stock as a legitimate value play? There are some very compelling reasons to believe the answer is yes.
Fundamental and Value Profile
BorgWarner Inc. is engaged in providing technology solutions for combustion, hybrid and electric vehicles. The Company’s segments include Engine and Drivetrain. The Engine segment’s products include turbochargers, timing devices and chains, emissions systems and thermal systems. The Engine segment develops and manufactures products for gasoline and diesel engines, and alternative powertrains. The Drivetrain segment’s products include transmission components and systems, all-wheel drive (AWD) torque transfer systems and rotating electrical devices. The Company’s products are manufactured and sold across the world, primarily to original equipment manufacturers (OEMs) of light vehicles (passenger cars, sport-utility vehicles (SUVs), vans and light trucks). The Company’s products are also sold to other OEMs of commercial vehicles (medium-duty trucks, heavy-duty trucks and buses) and off-highway vehicles (agricultural and construction machinery and marine applications. BWA has a current market cap of about $9.2 billion.
- Earnings and Sales Growth: Over the last twelve months, earnings increased almost 23%, while revenues increased nearly 13%. Growing earnings faster than sales is hard to do, and generally not sustainable in the long-term; however it is also a positive mark of management’s ability to maximize business operations. The company’s margin profile shows that Net Income as a percentage of Revenues improved from a little over 5% over the last twelve months to 10% in the last quarter.
- Free Cash Flow: BWA’s free cash flow is adequate, at $515.9 million. This number has improved significantly since the last quarter of 2015, when it dropped below $150 million, however it has also declined in each of the last two quarters from a high at the end of 2017 at about $620 million.
- Debt to Equity: A has a debt/equity ratio of .52. This is a very manageable number, however it is also worth noting that the company has a little over $2.1 billion in debt versus a little over $361 million in cash and liquid assets as of the last quarter. The company’s balance sheet indicates their operating profits are more than adequate to service the debt they have.
- Dividend: BWA’s annual divided is $.68 per share and translates to a yield of 1.54% at the stock’s current price.
- Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for BWA is $19.41 and translates to a Price/Book ratio of 2.26 at the stock’s current price. Their historical average Price/Book ratio is 2.96, suggesting suggests the stock is currently trading at a significant discount of about 30%. That is supported by the stock Price/Cash Flow ratio, which is currently about 50% below its average. Together, these providing a very compelling reason to take this stock seriously, with a long-term price of between $57 and $66 per share. That means the stock has some very good fundamental reasons to drive back to the 52-week highs it set at the beginning of the year, and even to possibly test its all-time highs, which were reached in 2014 at around $67 per share.
Here’s a look at the stock’s latest technical chart.
- Current Price Action/Trends and Pivots: The red diagonal line measures the length of the stock’s longer-term upward trend, and also informs the Fibonacci trend retracement lines shown on the right side of the chart. Since hitting its 52-week high at around $58, the stock has followed a significant downward trend that is on the verge of extending into a long-term period of time. Note, however that since the beginning of July the stock has consistently hovered between trend support around $43 and short-term resistance around $46 per share. Compared against the downward trend, that sideways pattern is called consolidation, and it suggests the stock could be building momentum to stage a significant reversal of that longer trend. A move above that top-end resistance could be taken as confirmation a new upward trend is about the start.
- Near-term Keys: The stock is currently at the low end of its consolidation range. A move above $46 would be a very good signal to act on for a bullish trade, either by buying the stock outright or by working with call options. If the stock breaks below support at around $43, however, the current downward trend would be reconfirmed, with the stock likely to drop down to its next support level, which from historical pivots would probably be between $38 and $40 per share. That could provide an opportunity to short the stock or to start buying put options.