BorgWarner: A Long-Term Revenue And Profitability Growth Play

BorgWarner (NYSE:BWA) is a medium-growth and highly innovative auto components company. Its long-term revenue is expected to grow at a CAGR of around 10%, which I believe will drive its long-term share price significantly higher from the current level. Since the electric vehicles business is the company’s focused business for the next five to seven years, and this industry has lots of growth potential, I think the company’s net income can also grow meaningfully in that timeframe along with revenue. I believe long-term growth-oriented investors can buy the company’s shares around the current price.

BorgWarner is a global leading supplier of various technology solutions for combustion, hybrid and electric vehicles. The company sells its products to original equipment manufacturers (“OEMs”) of light vehicles, commercial vehicles, and off-highway vehicles. The company aims at generating a considerable portion of its revenue from electric vehicles in the next five to seven years.

Growth Drivers

Electrification Product Portfolio

BorgWarner’s electrification product portfolio is its primary growth driver. The company’s new strategy is to grow this portfolio through organic investments and technology-focused acquisitions. I believe this strategy will help the company remain well positioned for capturing market share in the electric vehicles (“EV”) industry. Its electrification products help customers improve vehicle performance, propulsion and battery efficiency, and stability of engine. As a result, these products enjoy strong demand in the marketplace, and beat competitor products. The company's electrification products are cost-effective and long-lasting as well, which help them perform better in the competitive environment. The company is targeting to generate more than 25% of its total revenue from electrification products by 2025, and nearly 45% of its total revenue from these products by 2030. I expect the company’s EV-products will help it generate revenue growth at an increasing rate in the long term driven by growing EV demand in the auto industry.

Turbocharger Products

Another growth driver for BorgWarner is its automotive turbocharger products, which the company will keep in a separate business with an intended spin-off in late 2023. Following the spin-off, the company will be separated in two businesses, with an electric propulsion and drivetrain business, and an air management business. Following the completion of the spin-off, current BorgWarner shareholders would own shares in both companies. Therefore, BorgWarner’s turbocharger products are an important growth driver in its current form. The company’s turbocharger products perform well in the in the competitive environment since they keep auto engines cleaner compared to competitor products with improved air quality. Since turbochargers help automakers keep engines remain compliant to the stringent emission standards, the demand for turbocharged engines are increasing, which leads to greater demand for BorgWarner’s turbocharger products. I believe the company’s turbocharger products will help the spun-off company generate long-term revenue growth in a sustainable way with is industry-leading light, commercial and off-highway applications for turbochargers.

Competition

BorgWarner conducts its business in a highly competitive environment. The company's competitors include Garrett Motion (GTX), Mitsubishi Heavy Industries (OTCPK:MHVYF), Mitsubishi Electric Corporation (OTCPK:MIELF), Lear Corporation (LEA), Aptiv PLC (APTV), Dana Incorporated (DAN), and DENSO Corporation (OTCPK:DNZOF). BorgWarner competes with its competitors on the basis of quality of product, depth of products offered, and price.

The company’s primary competitive advantage is that its electrification product portfolio offers long-lasting battery lives with far less trouble compared to competitor products. Since its EV-products offer customers technologically advanced ways for making superior EVs with virtually trouble-free experience for drivers, these products enjoy great demand in the marketplace with continuous long-term revenue growth opportunities for the company. The company’s other competitive advantage is that its turbocharger products help automakers manufacture vehicles with engines offering a safe and smooth driving experience, while maintaining significant fuel-efficiency compared to competitor products. As a result, these products enjoy long-term demand growth in the marketplace with meaningful revenue growth opportunities for the company.

Fourth Quarter 2022 Results

BorgWarner reported fourth quarter 2022 revenue of $4.11 billion, up 12.39% year-over-year, and beats by $220 million. Non-GAAP earnings per share came in at $1.26, up 15.87% year-over-year, and beat by $0.18. Adjusted operating income came in at $428 million, up 14% year-over-year. Net cash provided was $890 million, up 64% year-over-year.

The company offered excellent results for the fourth quarter of 2022. The company’s top-line increased driven by new customer wins and expansion of electrification product portfolio, and bottom-line expanded driven by strict cost control measures and excellent factory execution. The company declared a quarterly cash dividend of $0.17, which was impressive. I expect that the company will grow its future dividend in a significant way driven by meaningful top-line and bottom-line growth. This is expected to happen due to the company’s winning of new customers, leading to significant market share growth. With the demand for EVs growing exponentially, I expect the company will become a whole new revenue generator with sustainable growth and consistent net income growth (EVs should become profitable for both manufacturers and end-users in the long run). As a result, the company will be able to grow dividend payment meaningfully in the long term. Apart from a growth-oriented company, BorgWarner is expected to be a solid dividend grower, which is the reason for investing in the company in the long term.

I also believe BorgWarner’s battery cooling technology will help the company become a global leading EV component supplier in the next decade. Compared to the company’s competitive products in this area, the company offers cooling technology (exhaust gas recirculation cooler technology) with greater cooling capacity within a smaller installation space as well as reduced weight and cost. As a result, the company is expected to grow its long-term revenue significantly with battery cooling becoming an integral component of EVs.

Valuation

BorgWarner’s competitors include Garrett Motion, Lear Corporation, Aptiv PLC, Dana Incorporated, and Mitsubishi Heavy Industries.

(Data Source: Seeking Alpha)

BorgWarner is slightly expensively valued compared to its peer group companies. The company has an indebted balance sheet with cash and equivalents of $1,844 million, and total debt of $4,522 million. However, the company’s net leverage ratio is 1.20, which is not alarming. The company is expensively valued likely because of its EV business, which has greater revenue growth potential with significant margin expansion opportunities. Despite a bit expensive valuation, I believe the company’s shares can be bought around the current price due to strong capital market activities unfolding in the global economy in the next couple of years with strong and growing automotive sector performance expected to continue. The company’s commercial and off-highway vehicle products also have great revenue growth potential with inflationary pressure expected to subside in the next couple of years. I believe this is the right time to buy BorgWarner shares with a long-term (six year) time horizon. The upcoming spin-off is also conducive for strong price performance for the company’s shares.

In the last five years, the company’s revenue has grown at a CAGR of 10%. Assuming revenue will continue to grow at such rate, I will estimate the company’s long-term (six year) share price. The company's December 2021 revenue was $14,838 million, and at a CAGR of 10% its beginning-2028 revenue will be $26,280.00 million, or $112.25 per share. In the last five years, the company's shares have traded between the price to sales multiples of 0.40x and 1.10x, and I expect in the next six years the company's shares will touch a price to sales multiple of around 1.0x at the higher side driven by rising demand for its technologically advanced and highly innovative EV components for the next decade. Applying a price to sales multiple of 1.0x on the company's beginning-2028 expected revenue per share, I get the company's beginning-2028 share price as $112.25 (factoring in the spin-off).

Risks

BorgWarner’s future success depends on its ability to attract big customers with the potential to contribute to its revenue growth in a significant way. They are known as key customers. These key customers generate a significant portion of the company’s revenue. However, acquiring such key customers isn’t an easy task. If the company fails to acquire key or big customers on a consistent basis, its revenue growth and profitability could be negatively impacted.

In my view, the automotive industry’s long-term aim is developing fully autonomous electric and hybrid vehicles which will gradually replace diesel and gasoline propulsion systems. BorgWarner is aiming at developing auto components which align with the automotive industry’s long-term aim. However, the company’s aim is difficult to achieve since fully autonomous vehicles will take time to come to the marketplace. If the company fails to develop new products or acquire new technologies which are aligned with the auto industry’s aim, the company’s long-term revenue growth and profitability could be negatively impacted.

Conclusion

BorgWarner is aiming at generating a significant portion of its revenue from its electrification product portfolio by 2030. I believe this is an excellent approach to profit from the on-going EV revolution. Since I think fully autonomous EVs are the ultimate future of the auto market, and BorgWarner is a leading player in the EV market, it has the potential to generate significant revenue growth from the fully autonomous EV revolution which could be gradually unfolding. Hency, I believe the company’s shares can be bought around the current price.