Investidea: BorgWarner, because it's darkest before dawn

Инвестидея: BorgWarner, потому что темнее всего перед рассветом

Today we have a moderately speculative idea: take stock of the manufacturer of auto parts BorgWarner (NYSE: BWA), to capitalize on the rebound of these stocks after the recent fall.

Growth potential and duration: 14% during 14 months excluding dividends.

Why stocks can go up: the company's business is doing well in difficult circumstances and therefore the stock should rebound after their recent fall.

How do we act: we take shares on 46,5 $.

When creating the material, sources were used, inaccessible to users from the Russian Federation. Hopefully, 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 are we writing, Are forecasts and hypotheses, not a call to action. It is up to you to rely on our thoughts or not..

And what about the author's predictions

Research, for example 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 perform better than people, but alas, they work worse.

Therefore, we do not try to build complex models.. The profit forecast in the article is the author's expectations. We indicate this forecast as a guideline. As with the investment in general, readers decide for themselves, it is worth trusting the author and focusing on the forecast or not.

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What the company makes money on

Т⁠-⁠Ж 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:

  1. USA - 19,9%.
  2. Germany - 11,55%.
  3. Poland - 6,84%.
  4. Hungary - 4,5%.
  5. United Kingdom - 2,71%.
  6. Others, unnamed European countries - 9,38%.
  7. China - 22,32%.
  8. Mexico - 10,18%.
  9. South Korea - 8%.
  10. Other countries — 4,62%.

Marginality of company segments

Revenue, percentage of total Adjusted pre-tax profit margin, percentage of segment revenue
Air control 55,07% 13,4%
Electric motors and drives 38,76% 9%
Fuel injection 4,8% 8,1%
Secondary market 1,79% 11,3%

Инвестидея: BorgWarner, потому что темнее всего перед рассветом

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 bounce.

Die hard with a vengeance. Last week, the company released its report for 3 neighborhood 2021. Given the huge challenges of the auto industry around the world, component shortages and logistics, the report from the company came out very decent. Let U.S. car production drop, and raw material and labor costs plague the reports of all companies, but BorgWarner surpassed analysts' expectations in such difficult conditions.

The only problem with the report was, 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 bottlenecks and component shortages will not last forever.. It's not guaranteed - it can always get worse, - but the likelihood of this is high. Manufacturers of raw materials and electronic components increase production rates, and logistics routes are optimized.

I think, after some time, investors will appreciate the stability of BorgWarner's business and come to its shares, since 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 marking time.

Инвестидея: BorgWarner, потому что темнее всего перед рассветом

Инвестидея: BorgWarner, потому что темнее всего перед рассветом

Инвестидея: BorgWarner, потому что темнее всего перед рассветом

Инвестидея: BorgWarner, потому что темнее всего перед рассветом

Инвестидея: BorgWarner, потому что темнее всего перед рассветом

Инвестидея: BorgWarner, потому что темнее всего перед рассветом

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 into its shares.

According to company 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 the share of BorgWarner there will already be 15%. By 2030, the market will reach 76 billion, and the company's share on it will be 30%.

From the point of view of an ordinary follower of the cult of the Planetina, 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 benefits 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 that they be encouraged to move to a green business.

  Spy grows on pre-market

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 in comparison with conventional cars, more or less met the plan. And all because, that its suppliers gave priority to the production and timely shipment of electric car parts - which they clearly did in the hope of pumping up their shares or other bonuses from the ESG lobby. Indeed, from an economic point of view, the electric car industry is untenable - it means, suppliers of spare parts were driven by certain considerations.

For some auto parts makers like Cummins, the “green” part of the business looks like a banner to ESG investors.: "Look, we are also thinking about ecology here!»But in the case of BorgWarner, the transition to electric cars, seem to be, really is 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 “the transition to sustainable, green development "will be very costly and will severely spoil reporting. The question is, how to minimize it, so that the bulk of investors does not start kicking and demanding a return to the policy "before Greta Thunberg", when companies made money, rather than saving nature. One of the ways is to pump up the quotes of “green” companies and make it easier for them to get loans..

With that said, BorgWarner will fallback to 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 of becoming one of the favorite ESG lobby shares..

Инвестидея: BorgWarner, потому что темнее всего перед рассветом

What can get in the way

Concentration. According to the company's annual report, 13% its revenue comes from Ford, and more 11% - Volkswagen. Can hardly be expected, that big clients will twist BorgWarner's arms: they are not in the right 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 USA, workers are on strike a lot., feeling the strengthening of their negotiating position. So this cup may not bypass these companies., what, in turn, negatively impact BorgWarner sales.

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Geography. The company does business all over the world. 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 this situation is very bad. There is some possibility, that things will get 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 region, million dollars

Revenue Share in total revenue
North America 3057 30,07%
Europe 3559 35,01%
Asia 3411 33,56%
Others 138 1,36%
Total 10 165 100,00%

Accounting. The company pays 0,68 $ dividends per share per year - which gives approximately 1,46% annual. It takes her $ 163.2 million a year to do this - about 21,19% from her profits for the past 12 months. I don't think, that for the sake of this untold wealth, many investors will come running to stocks. But problems can be.

The company has $ 9.471 billion in arrears, of which 3.637 billion needs to be repaid within a year. The company should have enough money for the most urgent debts and dividends: 1,507 billion in accounts plus 2.89 billion of counterparties' debts.

But if BorgWarner's marginality hit is stronger, than we hope, then dividends can cut. However, considering the low dividend yield, do not think, that in case of cuts in payments, the quotes will be overthrown to hell.

What is the bottom line

We take shares now by 46,5 $. I 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.

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