Citi Moving To The Sideline In BorgWarner, Downgrades To Neutral

Citi’s Itay Michaeli downgraded the rating for BorgWarner Inc. BWA from Buy to Neutral, while maintaining the price target at $37. The analyst cited relative valuation as the reason for the downgrade.

Fundamental View Unchanged

Following recent gains, BorgWarner’s shares have moved close to the price target, justifying the downgrade. Analyst Itay Michaeli said, however, that the fundamental view of the company’s secular growth story had not changed and there were no concerns related to execution.

“To become more constructive on BWA shares, we’d like to see either a more compelling relative risk/reward tradeoff or stronger evidence that BWA can grow at the high-end (or better) of its 4-6% organic rangel,” Michaeli wrote.

Recent Expectation Reset

Although expectations were recently reset, some of BorgWarner’s top North America customers have reported higher y/y US inventory days as of the end of February. Moreover, Volkswagen continued to be a major customer and BorgWarner’s backlog was “tilting more heavily” to China. Therefore, there is lack of clarity into whether the company would be able to “deliver outsized upside earnings surprises vs. peers,” the analyst commented.

Better Options

Michaeli said there is better risk/reward at certain Tier-1 peers. He cited Magna International Inc. (USA) MGA and Delphi Automotive PLC DLPH [both Buy-rated] as examples.