Today we have a moderately speculative idea.: take stock of the manufacturer of auto parts BorgWarner (NYSE: BWA), in order to capitalize on the rebound of these stocks after the recent fall.
Growth potential and validity: 14% during 14 months excluding dividends.
Why stocks can go up: The company's business is holding up well under challenging circumstances and the stock should bounce back after its recent drop..
How do we act: we take shares on 46,5 $.
When creating the material, sources were used, inaccessible to users from the Russian Federation. We hope, Do you know, what to do.
No guarantees
Our reflections are based on the analysis of the company's business and the personal experience of our investors, but remember: not a fact, that the investment idea will work like this, as we expect. Everything, what we write, are forecasts and hypotheses, not a call to action. To rely on our reflections or not – it's up to you.
And what is there with the author's forecasts
Research, like this and this, talk about, that the accuracy of target price predictions is low. And that's ok: there are always too many surprises on the stock exchange and accurate forecasts are rarely realized. If the situation were reversed, then funds based on computer algorithms would show results better than people, but alas, they work worse.
So we're not trying to build complex models.. The profitability forecast in the article is the author's expectations. We specify this forecast for the landmark. As with the investment idea in general, readers decide for themselves, it is worth trusting the author and focusing on the forecast or not.
We love, appreciate,
Investment editorial office
What the company makes money on
T—J already had a detailed overview of the company's business, therefore, here we will only talk about the level of marginality of different segments.
Revenue by country and region:
- USA - 19,9%.
- Germany - 11,55%.
- Poland - 6,84%.
- Hungary — 4,5%.
- United Kingdom — 2,71%.
- Other, unnamed countries in Europe 9,38%.
- China - 22,32%.
- Mexico - 10,18%.
- South Korea - 8%.
- Other countries — 4,62%.
Marginality of company segments
| Revenue, percentage of total | Adjusted pre-tax profit margin, percentage of segment revenue | |
|---|---|---|
| Air management | 55,07% | 13,4% |
| Electric motors and drives | 38,76% | 9% |
| fuel injection | 4,8% | 8,1% |
| Secondary market | 1,79% | 11,3% |
Arguments in favor of the company
Fell down. Since June of this year, the company's shares have fallen in price from 54.45 to 46,5 $. There were reasons for this, but we can hope for a rebound.
Die hard with a vengeance. Last week, the company released its report for 3 neighborhood 2021. Considering the huge problems of the automotive industry around the world, associated with the lack of components and logistics, the report from the company came out very decent. Let the production of cars in the USA fall, and the cost of raw materials and labor torment the reports of all companies, but BorgWarner surpassed analysts' expectations in such difficult conditions.
The only problem with the report was that, that BorgWarner gave a forecast for this year worse than analysts' expectations. But, Firstly, analysts' expectations are always taken from the ceiling and should not be taken seriously, and secondly, given the brave results 3 quarter, I think, that in the near future BorgWarner will surprise us and show the result better than expected. After all, logistical plugs and a shortage of components will not drag on forever.. It's not guaranteed - it can always get worse, - but it's highly likely. Manufacturers of raw materials and electronic components are increasing production rates, and logistics routes are optimized.
Think, after some time, investors will appreciate the stability of the BorgWarner business and come to its shares, because the result, achieved by the company in such difficult conditions, indicates a high level of management. But so far, investors have not reacted to the reporting., and stocks are treading water.
ESG. The review noted, that by 2030 the company plans to increase the share of sales of components in its revenue structure with less than 3 to 45%. It's hard to say yet, how far these plans will be realized, but in general the company's calculations, as well as its competence in this area, allow us to hope for an influx of ESG investors in its shares.
According to the company's estimates, market for matching solutions for electric vehicles: heating systems, inverters, motors, etc. - $ 11 billion, and the share of BorgWarner on it is about 5%. By 2025, this market will grow to 38 billion, and BorgWarner's share there will already be 15%. By 2030 the market will reach the level of 76 billion, and the company's share on it will be 30%.
From the point of view of an ordinary follower of the Planeta cult, BorgWarner looks like a way to invest in the electric car supply chain and an opportunity to support this industry.. The logic is simple.: BorgWarner will see financial benefit from the electric car part of the business and will develop this direction. And if he doesn't see, it will develop more slowly, and the fragile supply chain of electric car makers will start to fall apart, as manufacturers of these components will demand encouragement for their transition to a greener business.
Tesla's latest report is an example of such a miracle.. In conditions, when all carmakers have lost sales due to logistical problems and lack of components, Tesla, initially more vulnerable to these problems due to the high level of requirements for complex electronic filling compared to conventional cars, more or less according to plan. And all because, that its suppliers gave priority to the production and timely shipment of exactly electric car parts - which they clearly did in the hope of pumping up their shares or other bonuses from the ESG lobby. After all, from an economic point of view, the electric car industry is untenable, which means, suppliers of spare parts were driven by certain considerations.
For some auto parts manufacturers like Cummins, the “green” part of the business looks like a banner for ESG investors: "Look, we also think about the environment here!» But in the case of BorgWarner, the transition to electric cars, seem to be, and is indeed considered the most important part of the corporate development strategy. Or BorgWarner is successfully pretending, what is it.
In general, the ESG-investing factor is very important here.. Now it has reached that point of development, when it became clear to investors and directors, that “transition to sustainable, sustainable development” will be very costly and will greatly spoil the reporting. The question is, how to minimize it, so that the bulk of investors do not start kicking and demanding a return to the policy “before Greta Thunberg”, when companies made money, and not engaged in saving nature. One way is to pump up the quotes of "green" companies and make it easier for them to get loans..
With all of the above, BorgWarner will drop both, as in the ESG agenda the main place is occupied by the story about the transition of dirty businesses to environmentally friendly development. So BorgWarner has every chance to become one of the favorite stocks of the ESG lobby here..
What can get in the way
Concentration. According to the company's annual report, 13% its revenue comes from Ford, and also 11% - Volkswagen. Can hardly be expected, that big clients will twist BorgWarner's arms: they are not in the same position now. But their troubles are troubles for BorgWarner.
In the face of a labor shortage in the United States, you can prepare for news of workers strikes at Ford and Volkswagen factories.. Now in the US, workers are on strike a lot, feeling the strengthening of their negotiating position. So this cup may not pass by these companies, what, in its turn, will negatively affect sales of BorgWarner.
Geography. The company does business worldwide. In the USA there are only 20,4% its assets, and the rest is scattered across different countries - so BorgWarner is very dependent on the logistics situation. And the situation is very bad.. There is some possibility, that things will get even worse next quarter.
The cost of raw materials and labor will also have a negative impact on the company's margins - the reality may surprise us unpleasantly.
Revenue structure by regions, million dollars
| Revenue | Share in total revenue | |
|---|---|---|
| North America | 3057 | 30,07% |
| Europe | 3559 | 35,01% |
| Asia | 3411 | 33,56% |
| Other | 138 | 1,36% |
| Total | 10 165 | 100,00% |
Accounting. The company pays 0,68 $ dividends per share per year - which gives approximately 1,46% per annum. It takes her $ 163.2 million a year to do this - about 21,19% from her profits for the past 12 Months. I do not think, that for the sake of these untold riches, many investors will come running into stocks. But problems can be.
The company has $ 9.471 billion in arrears, of which 3.637 billion must be repaid within a year. There should be enough money at the disposal of the company for the most urgent debts and dividends: 1,507 billion in accounts plus 2.89 billion of counterparties' debts.
But if BorgWarner's margin hit is stronger, than we hope, then dividends can cut. However, considering the low dividend yield, do not think, that in the event of a cut in payments, quotes will be overthrown in hell.
What's the bottom line?
We take shares now by 46,5 $. Think, that, taking into account all the described positive aspects, we can expect the growth of quotations to 53,1 $ during the next 14 Months.
