BorgWarner Shares Down Despite Earnings Beat - Analyst Blog

Shares of BorgWarner Inc. BWA lost 2.4% on May 1, 2014, due to the impact of the overall market movement, despite posting a 28% increase in adjusted earnings to 83 cents per share in the first quarter of 2014, compared with 65 cents in the first quarter of 2013. Earning per share outpaced the Zacks Consensus Estimate of 80 cents.

Including the impact of non-recurring items, BorgWarner recorded earnings of $159 million or 69 cents per share in the first quarter of 2014, increasing from $142 million or 61 cents per share a year ago.

Revenues increased 13% year over year to $2.08 billion, in line with the Zacks Consensus Estimate. Excluding the impact of foreign currencies in both 2013 and 2014 and the Gustav Wahler acquisition in 2014, revenues went up 9% year over year.

Operating income increased 17.5% to $233 million or 11.2% of net sales from $198.5 million or 10.7% in the first quarter of 2013.

Segment Details

Revenues in the Engine segment rose 12.2% to $1.41 billion. Excluding the impact of foreign currencies and the Gustav Wahler acquisition, net sales went up 8% in the segment, driven by higher global sales of turbochargers, exhaust gas recirculation (EGR) coolers and engine timing devices.

Adjusted earnings before interest, income taxes and non-controlling interest (adjusted EBIT) increased 15% to $232 million in the quarter from $202 million in the first quarter of 2013.

Revenues in the Drivetrain segment rose 13.3% to $681 million. Excluding the impact of foreign currencies, net sales increased 12%, driven by increased global sales of all-wheel drive systems, traditional transmission components and dual clutch transmission modules. Adjusted EBIT increased 44% to $81 million from $56 million in the first quarter of 2013.

Financial Position

BorgWarner had $808.1 million in cash as of Mar 31, 2014, compared with $939.5 million as of Dec 31, 2013. Total debt including notes payable was $1.37 billion as of Mar 31, 2014, compared with $1.22 billion as of Dec 31, 2013. Consequently, the debt-to-capitalization ratio was 26.8%, compared with 25.2% as of Dec 31, 2013.

In the first quarter of 2014, net cash provided by operating activities increased to $46 million from $16 million in the comparable prior-year period. Capital expenditures, including tooling outlays, went up to $126 million from $87 million in the first quarter of 2013.

Dividend Update

BorgWarner declared a quarterly cash dividend of 12.5 cents per share, payable on May 16, 2014 to shareholders of record as of May 2, 2014.

Acquisition Update

BorgWarner completed the purchase of all the shares of Gustav Wahler GmbH u. Co. KG and its general partner. Wahler is a manufacturer of EGR valves, EGR tubes and thermostats. Wahler's units are located across Germany, Brazil, the U.S., China and Slovakia. The demand for EGR technologies is expected to increase due to the increasingly stringent emissions regulations and the need for higher fuel economy.

Outlook

For 2014, BorgWarner's organic sales are expected to increase between 12% and 15%, up from the previous guidance of 7% to 11%. It expects net earnings (excluding non-comparable items) for the year to be $3.15–$3.30 per share share, up from the previous guidance of $3.10–$3.25 a share. Operating margin for 2014 will likely be 12.5% or more. The Gustav Wahler acquisition is not expected to have any significant impact on the operating income and net earnings this year as the income generated by the business will be offset by purchase accounting adjustments.

Zacks Rank

BorgWarner is a leading manufacturer of powertrain products for major automakers. The company's products are capable of improving vehicle performance while meeting fuel-efficiency and emission standards. The company operates in 60 locations in 19 countries. Its products are sold worldwide, primarily to original equipment manufacturers of passenger cars, SUVs, trucks and commercial transportation products.

BorgWarner currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks worth considering in the sector include Gentherm Incorporated THRM, Tower International, Inc. TOWR and Superior Industries International, Inc. SUP, all of which sport a Zacks Rank #1 (Strong Buy).