BorgWarner: Electrifying The Product Lineup

In August of last year, I thought that the shift to electric vehicles ("EVs") was in full focus in the case of BorgWarner Inc. (NYSE:BWA). The company was in the early innings of electrification of its products, and while valuation multiples were low, I was aware of the daunting task ahead and the notorious cyclicality displayed by automotive suppliers at large.

More bolt-on deals and a big spinoff accelerate the move towards electrification, but I still have some questions on the strategy, making me a bit cautious after a partial re-rating of the stock.

A Recap

BorgWarner came into existence in its current form following a $3.3 billion deal for Delphi, creating a $14 billion automotive supplier giant, but more importantly, Delphi added a lot of electrical expertise. On top of this deal, BorgWarner acquired AKASOL AG in an EUR 727 million deal to further add to the EV ambitions with a designer and manufacturer of battery packs.

With just 3% of revenues generated from electrification, I found a $50 stock in 2021 demanding, trading at 15 times earnings and 2 times leverage, as the sector is notoriously cyclical, and the EV contribution was still modest. Through the summer of 2022 shares fell to the $40 mark amidst supply chain issues, inflation and chip shortages.

This came after the company posted adjusted earnings of $4.15 per share on a $14.8 billion revenue base in 2021, with GAAP earnings coming in just half that number. Revenues from electrical vehicles were set to more than double to $800 million in 2022, a year in which revenues are seen at a midpoint of $16.2 billion, with adjusted earnings per share seen around $4.375 per share.

After a softer first quarter, the company cut the midpoint of the earnings guidance to $4.20 per share, although the electrification revenue guidance was upped to $850 million, equal to 5% of sales. The company furthermore acquired Rhombus Energy Solutions in a $185 million deal to add a certified charging business to the line-up.

With earnings multiples down to 10 times in the summer and progress made on electrification, the situation looked a lot more friendly at $40 last summer, although it was the same cyclicality which prevented me from getting too upbeat.

Some Struggles, Coming To Life

In the fall of last year, shares of BorgWarner actually fell to the $30 mark, but recovered to the $40 mark in the spring of this year, now trading at $45 per share, within imminent reach of the highs seen over the past year.

Earlier this year, BorgWarner posted a billion increase in full year sales to $15.8 billion, with GAAP operating earnings advancing in a more pronounced manner to $1.37 billion, as GAAP earnings of $944 million worked down to $3.99 per share with adjusted earnings reported at $4.60 per share. At the same time it was the electrical sales component which increase to $870 million.

The company guided for 2023 sales to advance to a midpoint of $17.1 billion, with adjusted earnings per share seen up to $4.50-$5.00 per share. To further refine the business, the company announced its intention to separate the Fuel Systems and Aftermarket segments into a new company, with these segments together being responsible for $3.6 billion in sales in 2022, over a fifth of total revenues. The company guided for a continued rapid adoption of electric technologies, with those sales seen to just between $1.5 and $1.8 billion in 2023.

In May, BorgWarner posted an 8% increase in first quarter sales to $4.2 billion, with GAAP earnings advancing by 9 cents to $0.93 per share. The company now saw sales at a midpoint of $17.5 billion, with adjusted earnings now seen between $4.60 and $5.15 per share, all while net debt ticked up to $3.1 billion. Including hybrid products, E-product sales are seen at $2.3-$2.6 billion, with these revenues seen up to $10 billion, or 50% of the business by 2027.

In June, BorgWarner announced a bolt-on deal with the EUR 75 million purchase of the EHS business from Eldor, with these Italian operations adding an estimated EUR 25 million in revenues. The much anticipated spinoff of the Fuel System and Aftermarket business took effect in July as, with PHINIA (PHIN) appearing.

In rather volatile trading action, PHINIA has traded between $25 and $37 per share, currently commanding a modest $1.3 billion equity valuation at $28 per share. This deal makes that BorgWarner will see about $3.5 billion in sales and half a billion in EBITDA leave the door, as apparently just half a billion in net debt will be transferred from BorgWarner´s books.

And Now?

The reality is that there have been quite some moving parts. BorgWarner at large has done quite alright and the sales portion related to electrification continues to increase, which ticks the boxes. On the other hand, the PHINIA spinoff means that quite some sales and earnings power will leave the door, as the immediate pro forma implications are not yet fully known.

Amidst this, I am taking a wait-and-see approach, looking for some more clues on BorgWarner post the spinoff. However, I am rather impressed with the continued electrification of the product lineup, as it has now isolated some of the declining parts of the business with PHINIA, so BorgWarner Inc. subsequently trades at non-demanding valuations here.

If you like to see more ideas, please subscribe to the premium service "Value in Corporate Events" here and try the free trial. In this service we cover major earnings events, M&A, IPOs and other significant corporate events with actionable ideas. Furthermore, we provide coverage of situations and names on request!