1. Important disclosures appear on the last page of this report.
The Henry Fund
Henry B. Tippie School of Management
Liana Tamakloe [liana-tamakloe@uiowa.edu]
BorgWarner Inc. (BWA) March 12, 2015
Consumer Discretionary – Auto Parts & Equipment Manufacturing Stock Rating Hold
Investment Thesis Target Price $63 – $65
BorgWarner has been a market leader in the powertrain component supply
business and has strategic locations in 19 countries with 57 manufacturing
facilities. Additionally, implementation of emission regulations in China,
Europe and the US which is set to start in 2015 and continue through 2018 will
lead to higher demand for fuel efficient vehicles and for this reason we
propose a HOLD rating for BorgWarner.
Drivers of Thesis
Implementation of Emissions Standards – From September this year,
emissions standards implementation will drive growth in demand for fuel
efficient vehicles which in turn will drive demand for auto parts, and this
we forecast will grow BorgWarner’s business by 5% on average in the long
run starting 2020 and beyond.
Strategic location and business model operations – BorgWarner has
locations in the high automotive demand locations in the world and has
established strategic partnerships with all the major automotive
manufacturers, we believe this will continue to keep the company
appreciably diversified by geographic location thus growing its revenues on
average 7.6% over the 6-year forecast period.
Current favorable economic conditions, namely low interest rates and low
oil prices coupled with improving employment levels will drive demand for
automobiles and by extension auto parts and equipment.
Risks to Thesis
BorgWarner’s exposure to Europe is significant and can reduce growth
targets as the region is forecasted to grow by only about 1% in 2015. Also
foreign currency effect from these areas may reduce sales by about 6%.
Drastic emission regulations changes – unanticipated changes to emission
regulations will impact BWA’s business if imposing higher than expected
changes to emissions and fuel efficiency standards on motor vehicles.
Henry Fund DCF $76.63
Henry Fund DDM $55.32
Relative Multiple $36.73
Price Data
Current Price $60.08
52wk Range $48.40 – $67.49
Consensus 1yr Target $65.65
Key Statistics
Market Cap (B) $13.45
Shares Outstanding (M) 226.44
Institutional Ownership 91.2%
Dividend Yield 0.9%
Est. 5yr Growth 14.01%
Price/Earnings (TTM) 20.77
Price/Earnings (FY1) 17.00
Price/Sales (TTM) 1.66
Price/Book (mrq) 3.8
Profitability
Operating Margin 12.86%
Profit Margin 8.3%
Return on Assets (TTM) 9.7%
Return on Equity (TTM) 18.6%
Earnings Estimates
Year 2012 2013 2014 2015E 2016E 2017E
EPS $2.18 $2.89 $3.18 $3.43 $4.03 4.76
growth 1.17% 32.45% 9.83% 7.86% 17.49% 18.11%
12 Month Performance Company Description
BorgWarner is an auto parts and equipment
manufacturing company headquartered in
Auburn Hills, Michigan. The company engineers
and supplies powertrain components such as
turbo-chargers, emission systems, thermal
systems and transmission systems to Original
Equipment Manufacturers (OEMs) of passenger
vehicles, SUVs, light trucks and vans. Some of its
products are also supplied to manufacturers of
commercial vehicles and other off-highway
vehicles.1
BorgWarner operates internationally,
and has production facilities in Europe and Asia, in
addition to its North and South American
locations.
16.4
18.3
10.2
13.2
15.3
8.3
0
5
10
15
20
P/E ROE EV/EBITDA
BWA Industry
-25%
-15%
-5%
5%
15%
25%
M A M J J A S O N D J F
BWA S&P 500
Source: Yahoo Finance
Source: Factset
2. Page 2
EXECUTIVE SUMMARY
The US, China and Europe have all enacted additional
regulations aimed at controlling vehicle emissions and
ensuring fuel efficiency. They will be implemented
starting September 2015 for the US and in the coming
years for the other regions. These standards will ensure
demand for new vehicles when old ones do not meet the
standards, and will influence the manufacture of new
cars. This will drive up demand for fuel efficient parts and
equipment such as is produced by BorgWarner.
On an economic level also, current indicators are
favorable to expansion in economic activity, creation of
jobs and of wealth. These include low oil prices, low
interest rates and reducing unemployment rates. These
together make resources available for consumers to
spend on goods and services, among which will be
demand for consumer durables, such as cars.
As a global competitor, BWA has a diversified operations,
and has very well established relationships with its
customer OEMS. These long-term relationships provide
BWA with the added advantage of continued revenues
from OEMs for years to come.
Our analysis estimated revenue growth averaging 7.6%
over the 6-year forecast period, slowing down to 5% in
2020 and beyond for the continuing years. With a WACC
of 9.13%, our analysis led us to a DCF price of $76.63,
DDM price of $55.32 and a value relative to its peers of
$36.73 for the 2015 target year. Taking a weight of 60%
for the DCF value and 20% each for the DDM and relative
valuation, we come to a target price of $64.39, yielding a
7.17% potential upside for the stock. We believe this is a
fair representation of the value of the stock as vehicle
emission regulations, coupled with BWA’s client
partnerships will ramp up demand in the coming years,
however this will not achieve its full potential because of
slow growth in external markets, especially in Europe all
together which generate about 76% of BWAs revenues.
COMPANY DESCRIPTION
BorgWarner manufactures and supplies auto parts and
components for powertrain applications in the
manufacture of automobiles. The company operates two
segments; Drivetrain and Engine, and has production
facilities in the United States, Europe and Asia.2
Source: BorgWarner 2014 10-K
The products of the company are used in the
manufacture of new light vehicles, commercial vehicles
and to a comparatively lesser extent, manufacture of off-
highway vehicles. Among the output of BorgWarner are
turbo, thermal, emission and transmission systems that
improve vehicle’s performance through fuel efficiency,
stability and emissions control and provides better air
quality. BorgWarner sells its products to every major
Original Equipment Manufacturer (OEM) of motor
vehicles in the world, some Tier One vehicle systems
suppliers and then the aftermarket.
Engine Segment
BorgWarner’s Engine Segment produces turbochargers,
timing systems, thermostats, emission systems, diesel
cold starts and gasoline ignition technology for use in
both light and commercial vehicles. These products,
which make up about 67% of sales are mainly employed
to improve fuel economy, reduce emissions and enhance
performance of those vehicles in which they are used.
In management’s discussion in the company’s 2014 10-
K, it was noted that the segment benefited largely from
growth in turbocharger demand for both diesel and
gasoline engines globally. Turbocharger sales for light
vehicles in 2014 were approximately 28% of total net
sales for the year, and were supplied to major companies
such as BMW, Daimler, Ford, GM, Hyundai, Renault, VW
etc. For the commercial vehicle market as well,
BorgWarner supplied its turbochargers to manufacturers
of commercial and off-highway OEMs such as Caterpillar,
Deutz, John Deere, Daimler, MAN and Navistar.2
24%
26%
6%
5%
13%
8%
11%
7%
2014 SALES REVENUE BY REGION
United States
Germany
Hungary
France
Other Europe
South Korea
China
Other Foreign
Europe - 50%
3. Page 3
As a unit focused on producing fuel efficient
components, the Engine segment benefits from
increasing fuel efficiency standards and demand from
consumers for more economy vehicles. Under normal
conditions, falling oil prices as is being experienced
currently will make consumers indifferent about the fuel
usage of their vehicles. However, this will not affect
BWA’s business because when a vehicle manufacturing
platform is installed, manufacturers will incur
considerable costs to switch to other parts suppliers or
less fuel efficient technologies. For this reason the effect
of short term fuel price changes is greatly curtailed. In
September 2014, BorgWarner announced the opening of
its second turbo manufacturing plant in Tiancang, China
and in November of the same year, officially opened its
new production plant in Lanheses Portugal for the
manufacture of Exhaust Gas Recirculation (EGR)
technologies and diesel cold-start technologies3
. In light
of these moves to boost production of turbochargers,
EGR and diesel cold-start technologies, to meet growing
global demand, especially in areas such as China, we
believe BorgWarner will increase sales generated from
this segment by about 8.7% on average between 2015 –
2017 and should normalize to about 5% in 2020 and
beyond.
Drivetrain Segment
The Drivetrain segment which makes up the remaining
33% of BorgWarner’s portfolio of products manufactures
clutch modules, friction and steel plates, transmission
bands, torsional vibration dampeners, and coupling
systems for torque management in vehicles. These
products are for automatic transmissions and all-wheel
drive (AWD) vehicles that enable precise control, better
response time and minimal parasitic losses to improve
fuel economy and vehicle performance.
This segment is a global leader in dual-clutch
transmission (DCT) through its DualTronic® technology
that transforms a manual gearbox into an automatic
transmission system by eliminating the break that occurs
when shifting gears in a manual transmission system.
As part of the company’s restructuring efforts in Western
Europe, the company has been moving its manufacturing
operations to Poland in Eastern Europe. This program is
expected to be completed by the end of this year and
was highlighted by management of the company as one
of the factors that negatively impacted the segment in
the last financial year, Dec. 2014. Drawing from this
background and from management guidance, we are of
the opinion the drivetrain segment will grow by about 7%
in 2015, and then about 10% for the following two years,
after which we should expect a long-run growth of 5% in
2020 and beyond.
For the years 2015 to 2017, the company forecasts the
distribution of output from both its operating segments
to be distributed 71% and 29% between the Engine and
Drivetrain segments respectively. This is depicted in the
chart below with a subdivision of the various kinds of
components manufactured in each segment.
Company Analysis
Markets- The output of BorgWarner is sold to OEMs in
all the global markets the company operates in.
BorgWarner sells to all the major automobile
manufacturers in North America, Asia and Europe.
Among its clients, Volkswagon and Ford have been the
largest in terms of sales making up 17% and 13% of net
sales respectively as at year end 2014. The remaining
OEMs to which the company sells to are indicated in the
chart below.
Source: BWA Presentation, Deustche Bank 2015 Automotive Industry Conference
Source: BWA Presentation, Deustche Bank 2015 Automotive
Industry Conference
4. Page 4
Also, by classification of the kind of vehicle application,
in the year 2014, about 83% of the company’s output was
for light vehicle applications. This represents a strong
position in the light vehicle production space.
Source: BWA 2014 10-K
Locations - BorgWarner has 57 manufacturing,
assembly and technical locations globally. In Asia, the
company has operations in China, Japan, Thailand, India
and South Korea. In Europe, BWA’s locations are in
Germany, France, Hungary, Poland, UK, Portugal, Spain,
Sweden, Ireland, Italy and Monaco. In the Americas, it
has locations primarily in the US, then Brazil and Mexico.
Strategic Advantages - BorgWarner has several strategic
benefits as opposed to its competitors.
The company’s dispersed location base ensures that it is
strategically close to the OEMs it serves. Having presence
close to markets provides transportation advantages to
BWA, and reduces the volume of inventory the company
would otherwise have to carry. Additionally, there is
extensive collaboration between BWA and their OEM
engineers to implement and launch and production
programs. Once a program is launched, switching costs
become very high and prohibitive for OEMs.
Compared to BWA’s main competitors who serve a
variety of product offerings to different market segments
such as Honeywell, BWA has a focus on the light vehicle
market with about 83% of sales tailored to that segment.
This has helped BWA build proficiency and establish
strong relationships in these markets. It also allows the
company to focus its research efforts efficiently to
generate innovative solutions for the market, and re-
inforce its position in that space.
Key Risks - In spite of its robust strategy, BWA
continues to face competition from several industry
players. In each of its engine and drivetrain segments,
there are other competitors who compete with BWA on
the basis of quality, price, delivery, program launch
support and technological innovation. In light of the
competitive environment, the main risk to BorgWarner is
the bigger size and financial strength of these
competitors.
Demand for auto parts products draw largely from the
demand for new motor vehicles. As demand is cyclical
and especially during summer months when many OEMs
run their facilities at low productivity levels for change-
overs and vacations, sales of auto parts is adversely
affected. This is usually evident in the 3rd
quarter sales
drop.
BorgWarner uses aluminum, iron, steel, copper, plastic
resins and alloys in the manufacture of its products. For
this reason, commodity prices of such items as
aluminum, steel and iron go a long way to affect
productivity and profitability. The company employs
hedging, among other measures such as using long-term
contracts, cost-sharing arrangements with OEMs and
changes to product design to control these costs
however.
RECENT DEVELOPMENTS
Acquisition of Gustav Wahler GmbH & Co.
In the first quarter of 2014, BWA acquired 100%
ownership of the German EGR manufacturer Gustav
Wahler GmbH & Co. This acquisition was intended to
strengthen the company’s footprint in the production of
EGR valves, EGR tubes, and thermostats. Wahler
operates in Brazil, Germany, US, Slovakia and China. This
was also a strategic move to acquire the clientele base of
Wahler which had among its customers, manufacturers
of commercial vehicles to strengthen BWAs presence in
this market. On assets acquired, net of cash paid was
$110.5m at the time the acquisition was finalized in
February 2014.
83% 8% 5%4%
0% 20% 40% 60% 80% 100%
PRODUCT LINES (2014)
Light Vehicles Commercial Vehicles
Off-Highway vehicles After-market
5. Page 5
$1 Billion Share Buy-Back
In February of this year, the management of the
company announced that its board had approved a $1
billion3
share repurchase program to be completed over
the next three years representing approximately 7.35%
of shares outstanding at the date of this report.
Management did not provide specific dates or periods
when repurchases shall be carried out, but indicated that
it will be subject to prevailing market conditions. They
were of the opinion that this demonstrated
management’s belief in the growth of the company in
the long-term. We are of the opinion that in addition to
the company’s growth potential, this is a secure means
to return earnings to shareholders without unnecessarily
causing dividend volatility in the coming years. Based on
this backdrop, we forecasted treasury shares acquisition
to be $300 million in the first 3 years, and $200 million
going forward.
At the time of this report also, the company had
registered a $1billion offering of Senior Notes with the
Securities & Exchange Commission and among the stated
use of the proceeds of the offering was to for general
business needs and also to support its share repurchase
program.
Opening New Production Facilities
In growing its business across both its drivetrain and
engine segments, the company opened two new
manufacturing plants in China and Portugal.
The Chinese facility located in Taicing China, is set to
produce fuel-efficient turbocharging technology for the
increasing demand in the Chinese engine market where
emissions controls is projected to increase demand to
8.9m by 20191
. The facility, which is the company’s
second turbocharger facility in China, is strategically
located to developments near Shanghai and is designed
be green and efficient, having won the Gold LEED
Certification (Leadership in Energy and Environmental
Design).
In Portugal, the state-of-the-art facility is located in
Lanheses, Viana do Castelo. This facility was opened in
November of last year and it is to meet demand for
growing EGR technologies in the drivetrain segment. This
facility happens to be 50% bigger in size compared to
company’s current site in Valenca, Portugal and so offers
opportunities for easy expansion to accommodate
growing demand in the future.
Reported 2014 Annual Results
BorgWarner recorded record net sales of $8.3bn. This
was representative of a growth of 11.7% over that of
2013. In effect, operating income generated for the year
was $963.7m, being a margin of 12.9%, an increase over
the 2013 margin of 12.4% (margin percentage is
exclusive of non-comparable items). Net earnings per
share for 2014 was $2.86, an increase of $0.16 over that
for 2013. Performance was impacted by headwinds in
the foreign currency market, reducing sales by $8m and
leading to a $0.02 per share decrease in net earnings.
In 2014, the company increased its quarterly cash
dividend by 4%, and engaged in share repurchases to a
tune of 2.4 million shares at a total cost of $139.9 million.
Thus, total returns to shareholders was 18.28% in 2014.
In January 2015, the company issued guidance for its Full
Year 2015 earnings, projecting net sales to increase by
about 9.5% - 12%, but incorporating the impact of
weaker foreign currency, net sales growth is forecast to
be between 2% - 6%. The main foreign currencies
expected to negatively impact earnings include the
Brazilian Real, Chinese Yuan, Euro, Japanese Yen, Korean
Won, Mexican Peso and the Swedish Krona. This is
estimated to generate an EPS of between $3.35 and
$3.55 with an operating margin of 13%. The increase in
operating margin is expected to come from incremental
income as a result of higher net sales and the company’s
focus on managing costs. In comparison to our model, we
forecast EPS to be $2.9 for 2015, arising from a net sales
growth of 7.6% over the same period. Our analysis
further leads to an operating margin of 11.75%. Our
estimates are below that of the company’s guidance as
we considered the impact of weakening foreign currency
experienced from the time of management’s publication
of its guidance until the preparation of this report.
INDUSTRY TRENDS
Emission Control Regulation
In recent times, the auto parts manufacturing industry
has been impacted by more stringent regulation among
6. Page 6
other factors. The main market areas for automobile
production, namely the US, China and Europe all have
on-going vehicle emission reduction standards that are
reviewed on a regular basis to ensure a cleaner, safer
environment in their respective countries. New
standards however have been set which will come into
effect from May 2017 for the US Tier 3 regulations,
September 2015 for the Euro 6 applicable to the EU
countries and January 2018 for the China 5 standard4
.
The regulations pose varying degrees of motor vehicle
exhaust emission limits as well as required fuel
consumption limits for both diesel and gasoline
passenger and light-duty vehicles. As these dates are in
future times, there is current demand on auto parts
manufacturers to develop emission and fuel efficiency
systems to meet these requirements. The graph below
shows the implementation dates for some of the
prominent global emission control regulations.
VEHICLE EMISSION REGULATIONS – GLOBAL TREND
Source: BWA Presentation, Deustche Bank 2015 Automotive Industry Conference
Electric Vehicles
There is growing interest in the development of electric
vehicles. This interest stems from the benefits derived
from this class of vehicles; namely fuel economy,
reduced carbon dioxide emissions (no emissions in All-
Electric vehicles), fuel cost savings and flexibility with
refueling. Some electric vehicles are either hybrids
between hydrocarbon fueled or electricity charged, or
are All-Electric. Increasing interest in production of these
cars on a larger scale than is produced now has many
different implications for the auto parts suppliers (APS)
industry. It will eliminate the exhaust system
manufacturers in the industry, and at the same time
create opportunities for research and development in
the areas of more efficient battery charging and energy
storage systems for these vehicles. The graph below
shows the projected rate of electric vehicle production.
It does not appear to grow dramatically up until the end
of this decade but there lies prospects if a company
positions itself well to develop the energy storage
devices and systems needed to make these cars normal
standard.
BorgWarner manufactures the eGearDrive® electric
drive transmission for the emerging electric vehicle
market. Clearly, BWA has positioned itself to be
proactive in the trend towards electrification of the
automotive market.
With respect to demand for electric vehicles, information
available shows a mixed reaction from consumers.
General Motors and Toyota both had sales of their hybrid
electric passenger vehicles fall by 12% and 11.5%
respectively as at mid-year 2014. On the other hand
though, Nissan Motors and Tesla Motors Inc. both
recorded increased sales of 34% and 47% in sales growth
as at the same period last year5
.
Sales of electric vehicles have increased year on year
from 2012 to 20146
, but the rate of growth was lower in
2014.
With the growing interest in generating cleaner energy
to sustain the environment, evident in the enactment of
emission regulations, we believe increasingly electric
vehicle sales will pick up in the coming years and this
should have a positive impact on BWA’s business as our
search revealed that compared to its competitors, BWA
Source: KPMG Global Automotive Executive Survey
7. Page 7
is a leading producer of electric vehicle transmission
systems for the light vehicle market.
Source: Seeking Alpha, 2015
This situation may be attributable to the current low oil
prices being experienced whose fall started in the middle
of last year. A survey of automotive industry executives
by KPMG however shows that it is anticipated that by
2025, 10% of new vehicle sales will be electricity
powered.
MARKETS AND COMPETITION
Competitive advantage in the industry is achieved
through price, quality, delivery, technological
innovation, engineering development and program
launch support to OEMs.
Dominance by one or a few manufacturers in the
industry is generally low, making income distribution for
industry participants dispersed. As a result, small
specialized firms concentrating on a specific niche in the
market generate the majority of the revenue, whereas
about 27.4% is accounted for by the top four largest
companies.
In the wake of the credit crunch of 2008, many
automobile manufacturers experienced reduced
demand while they had built up inventories in
anticipation of sales. As people were not making new
purchases of vehicles, demand for automotive parts also
fell and as some of the companies filed for Chapter 11
bankruptcy, the negative fortunes also affected the
businesses of many auto parts suppliers.
Source: Factset
Competitive Landscape
Number of competitors - There are a number
competitors within the industry with each player focused
on a specific niche in the market. Competition among
these players can be fierce as establishing a contract with
an OEM leads to long-term relationships and continued
business. Smaller companies sometimes sell their
products to the larger suppliers who have contract
relationships with OEMs.
Potential for New Entrants – The industry is fairly capital
intensive and operates on the basis of technological
innovations. Additionally, it is fairly regulated and very
competitive among the present participants.
Power of Suppliers – Suppliers of raw materials such as
aluminum, iron, rubber etc., are not very powerful. This
is because prices of raw materials are more often than
not dictated by global commodity prices. However, when
prices are not favorable at a particular time, suppliers
52,607
97,507
119,710
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
2012 2013 2014
No. of Hybrids Sold
40.00
60.00
80.00
100.00
2004 2006 2008 2010 2012 2014
#ofCars(m)
WORLD AUTOMOBILE PRODUCTION
Source: KPMG Global Automotive Executive Survey
8. Page 8
create artificial shortages in the market until market
prices rebalance to acceptable levels to suppliers.
Power of Customers – Customers tend to be very
powerful as they have a good number of alternative APSs
to fall on. One single supplier does not supply all the
component parts for all the different classes of a
manufacturer’s vehicle range.
OEMs source different parts from different OEMs. They
therefore wield a lot of influence on selecting a particular
supplier.
Threat of substitution – Some OEMs have integrated
backward into the APS industry mostly through
acquisitions. This threat is high and intensifies
competition, even between suppliers and customers.
In summary, parts suppliers go to great lengths to satisfy
their clients in the area in which they operate. This
includes yielding to annual price reductions in supply
contract renegotiations, partnering with OEMs to design,
develop and launch a program for manufacture of a
range of vehicles, and sharing in liability costs that arise
from product liability suits to the OEMs. Also, to remain
competitive suppliers invest heavily in R&D making it a
key component of the cost structure of ASPs.
Peer Comparisons
Compared to its peers, BorgWarner appears to be an
average performer in terms of operational metrics but
trades as the highest PE in that range at 17.3x earnings.
This is attributable to the fact that despite its mid-size, it
is able to efficiently manage its costs which then
improves the bottom line. It is reflective of the high
earnings potential of the company which it derives from
its focus, as a company, on components for application
in automobile manufacturing whereas its competitors
such as Cummins also manufacture components for
other industrial uses such as power generation. The
automobile industry is onto a strong recovery from the
slump during the 2008/2009 financial crises.
Additionally, the market may be judging it to be a low risk
investment as it only has a debt ratio of 10%, which is
among the lowest in its range.
The next best competitor to BorgWarner judging from
the comparable metrics is Honeywell Inc. with a P/E of
16.8, a higher EPS forecast of $6.1 and a higher net profit
margin and ROE of 10.5% and 24% respectively,
compared with BWA’s 8% and 19% respectively. Even
more interesting is the fact that with only just 2.7 of sales
spent on capex, Honeywell generated such impressive
results.
Research and development is an integral component of
the business of the auto parts manufacturers. In 2014,
among BWA’s main competitors, DLPH spent the most
on R&D as a percentage of net sales, followed by HON,
with each spending 7.8% and 4.5% respectively of net
sales on R&D. BWA, CMI and AXL each spent 4%, 3.8%
and 2.8% respectively on R&D. In absolute value terms,
HON spent the most on R&D being a big player in the
industry, and this represents a 5% increase over that of
2013, and which was attributed to new product
development in its Automation & Controls division, and
Performance Materials & Technologies division. BWA
has a policy of spending approximately 4% of net sales on
R&D. The percentages vary across firms but each firm has
a threshold they work to operate within in order to
control costs. Additionally, clients reimburse the parts
suppliers for some of the R&D work. We believe
considering BWA’s market size compared to
competitors, 4% is an appropriate level of R&D
investment, as the average across all firms stands at
4.54%.
Company Ticker
Mkt
Cap
P/E(ntm)
EPS
(’15)
Div.
Yield (%)
Net Profit
Margin (%)
Debt
Ratio (%)
ROE
(%)
Operating
Margin (%)
Capex/
Sales
(%)
BorgWarner Inc. BWA 13.6B 17.3 3.5 0.9 8.0 10.0 19.0 12.0 7.0
American Axle &
Manufacturing Holdings, Inc.
AXL 1.9B 9.4 2.7 0.0 3.8 46.7 126.0 7.2 5.6
Cummins Inc. CMI 25.5B 13.8 10.2 2.2 8.6 10.0 20.4 12.3 3.9
Delphi Automotive PLC DLPH 22.7B 14.3 5.5 1.3 7.9 22.5 44.8 10.9 5.0
Honeywell International Inc. HON 80.2B 16.8 6.1 2.0 10.5 13.3 24.0 14.4 2.7
Source: Factset and Companies’ 2014 10-K
9. Page 9
ECONOMIC OUTLOOK
As a company in the Consumer Discretionary Sector,
occurrences in the wider economic sphere often have a
direct impact on the immediate future of the company.
Among the most prominent drivers are:
GDP Growth
As the US, and by extension the world economy grows,
more people will have jobs and earn income, and will
have money to spend on consumer durables.
Additionally, economic growth will mean that people will
demand vehicles to commute to work, and a growing
middle class will then shift demand from commercial
transport options to owning their own vehicles,
especially in economies such as China. In 2015, the
Congressional Budget Office of the US anticipates that US
GDP growth will be 2.9%7
whereas the IMF forecasts
global GDP to grow at about 3.5%8
. We anticipate GDP
growth to be about 3.05% in the long run for the US, and
about 3.12% over the next 6 months. With increased
growth forecast, we anticipate growth in the economy to
fuel increased wealth of individuals who will in turn
spend some discretionary income on consumer durables
such as automobiles. This will be help drive the growth in
the business of BWA.
Interest Rates
In the wake of the 2008 – 2009 economic crises, central
banks all over the world cut interest rates in an attempt
to stimulate demand and generate economic growth.
The recovery from the recession was however very
sluggish although some economies such at the United
States and the United Kingdom have experienced steady
growth signaling recovery from the crisis. Interest rates
have however remained low with some central banks in
countries such as Japan, China, India, Australia among
others cutting back interest rates in recent times. It is
expected that the rate reductions will filter through the
economy to the individual consumer to stimulate
demand. If we see this low interest environment persist,
consumers will continue to take out loans at lower costs
for purchases of durables, including automobiles.
However, with the recent uncertainty regarding the
Federal Reserve timeline for increasing its Fed Funds
rate, we are likely to witness interest rates rise soon,
likely with minimal increases by the end of this year, and
which will impact negatively on vehicle demand.
Source: US Dept. of the Treasury
Strengthening Dollar
BorgWarner has almost half of its revenue being
generated outside the United States. Even though this
provides the company diversification in terms of the
sources of its revenue, translation of foreign revenue
into US Dollar terms negatively impacts reported
performance. With the current outlook of the global
economy, the strengthening of the dollar is likely to
persist at least for the greater part of 2015.
The company expects growth in net sales in 2015 to be
6% - 7.5% lower than what would have been achieved
ignoring the impact of currency translations. We
modeled sales growth therefore to be 7.6% as a result.
Fuel Prices
Fuel prices have been trading just about the $50 mark in
the last month, a moderate price appreciation from its
all-time low of $45/barrel in January. This price is about
50% of its peak of about $100 in June of 2014. As fuel
becomes cheaper, it increases disposable income of
consumers, leading to increased demand for goods and
services, and thereby demand for vehicles. Sentiments
amongst business participants is that oil is yet to reach
its bottom price. We anticipate that in the coming half
year, oil prices should still be about $50/b. As this era of
low oil prices persist, consumers will continue to make
more savings, and have money to spend on durable
goods. This should positively impact on the performance
0
1
2
3
4
5
6
Yieldasat31st.Dec.(%)
1-YR USTREASURY YIELD
10. Page 10
of BorgWarner through increased demand from OEMs. It
would be expected that as BWA produces more fuel
efficient vehicles, low oil prices will be detrimental to its
business as consumers will be indifferent to the fuel
efficiency of the cars they purchase. However, the effect
of regulations and the high switching costs to OEMs from
changing production platforms to less fuel efficient
components will be detrimental and ensure continued
demand for BWA parts. Additionally, BWA manufactures
parts for SUV’s and light trucks and so should consumers
substitute demand for such vehicles, it will not have a
negative impact on sales by BWA. The effect of the low
oil prices then will essentially just translate into
increased disposable income for consumers.
Source: Nasdaq, March 2015
Improved Labor Statistics
For the month of February the US economy added on an
additional 295,000 non-farm jobs and reported an
unemployment rate of 5.5%, a reduction of 0.2% only a
month earlier. Improved employment conditions mean
that more people will have jobs, some will get better jobs
and which translates to more income to spend. The
prospects of improved expenditure by the population
holds positive promise for the automobile and auto parts
manufacturing industry.
CATALYSTS FOR GROWTH
As fuel efficiency and vehicle performance with respect
emissions control become more stringently regulated in
all the markets that BorgWarner operates in, there will
be increased demand for turbochargers and the other
performance enhancing components BorgWarner
manufactures. The adoption and implementation
timelines for the US Tier 3, Europe’s Euro 6 and China’s
China 5 standards are not far off into the future and as
such present immense growth opportunities in BWA’s
current markets.
Demand for new vehicles is influenced by a number of
factors. As we witness improving economic conditions
especially in the US, growth in GDP will translate to more
jobs, more income and then more spending, some of
which will be on durable goods such as vehicles. Stronger
GDP growth, in Europe where currently 50% of sales is
generated will grow demand for BWA engine and
drivetrain components. Also, higher than expected
growth in China, India and Brazil should drive growth for
BWA.
The average age of vehicles on US roads is about
11.4years and this number is expected to grow to 11.5 in
2017 and 11.9 in 2019. This rate of change in average
vehicle age is estimated to be slower than in the last 5
years9
, implying that all things equal, people are likely to
change their vehicles more often than in the last 5 years.
This will mean demand for new cars and will positively
impact demand for auto parts. Also as new technologies
are being developed and consumers are increasing
seeking out ways to make technology a part of their
everyday lives, new inventions in new cars will cause
consumers to scrap, or change vehicles more regularly,
given that economic trends remain positive.
INVESTMENT POSITIVES
• BorgWarner has operations in the major auto
manufacturing hubs around the world, and has
established solid relationships with OEMs in all these
locations. We believe this makes it very well
geographically diversified to take advantage of
growing opportunities in those markets, and have a
good hedge against downturns in others.
BorgWarner has invested strategically in businesses
that provides it a wide portfolio of powertrain
application components, yet has designed a model
to concentrate in the two main business segments,
engine and drivetrain. This has allowed the company
11. Page 11
to develop expertise and innovative capabilities in
these segments whereas its competitors operate in
other auto parts markets, gaining more diverse
revenue sources but not quite the expertise of BWA.
INVESTMENT NEGATIVES
With about 50% exposure to the European market,
and with the less than favorable growth forecast of
for this year, BorgWarner may find achieving its
growth targets in those markets a stretch.
Compounding the risk is the strengthening of the US
dollar in recent months, which will lead to lower net
sales for BWA as about 75% of net sales is generated
outside the US.
As a result, we anticipate that net sales growth will be
about 6% less than what could be achieved assuming
there was no external market effect.
VALUATION
Terminal Growth Rate – A terminal growth rate of
5% was chosen as the rate at which BorgWarner will
grow future revenues in the steady state. This was
selected because we believe this level of growth is
reflective of long-term US GDP growth which is
forecasted to be 2.9%7
in 2015 & 2016, and with
enough allowance factoring in BorgWarner’s strong
growth capacity arising from its strong global
presence (18 global locations2
), innovative capacity,
and the recent surge in production and sales of
automobiles.
In the forecast years leading to the terminal period,
the Engine segment was forecasted to grow at 7% in
the 1st
FY, 100bp ahead of the Drivetrain segment as
the movement of the Drivetrain segment in Eastern
Europe is still underway and will not generate
immediate outstanding growth results until the
restructuring is completed. Upon completion of the
move, growth in Drivetrain is expected to outstrip
Engine by about 2% on average before both
converge at the terminal rate of 5%.
Cost of Sales – COGS was forecasted at 76.2% of
sales. This was the 6-year historic average from 2009
to 2010. This percentage had not changed
significantly in the said time frame and was thus used
as the constant percentage over the forecast period.
SG&A – SG&A was forecast at 5% of net sales.
Average SG&A was 5.62% over the 6years preceding
our forecasts, however a lower 5% was chosen to
cater for cost savings the company will realize arising
from efficiency of its processes over the forecast
period.
Operating Margin – Operating margin for 2015 is
estimated to be 11.75%, increasing by an average
138bp over the forecast period to 18.65% in 2020.
Research & Development – Expenditure on R&D was
estimated to be 4% of sales throughout the forecast
period. This was used because an analysis of R&D
expenditures in the 6year period spanning 2009 to
2014 showed an average expenditure of 4%3
and
management also strongly reinforced its
commitment to investing at least that much in
research as it was considered a vital function in the
success of the company.
Capital Expenditures - Capex was forecasted to grow
at the rate of growth of sales as we believe that as
sales grow, BorgWarner shall invest in equipment to
facilitate production at the increased rate of sales.
The new production site in Poland is assessed to be
1.5 times that of the facility in Western Europe with
management indicating that an expansion of the
facility to meet increasing demand will be easier.
Beta – A beta of 1.47, representing a simple average
of the 2-year and 3-year monthly betas from
Bloomberg was used. Both betas did not vary widely
in value, and were chosen because we felt that
represented more accurately the variability of the
stock in recent times, and thus a more stable
estimate. A beta beyond three years would be higher
and exhibit more variability as the world economy at
the time was still recovering from the recession.
Risk Premium and Risk-Free Rate - An equity risk
premium of 4.85% was used, which is an average of
the 87-year Geometric average of stock returns in
excess of the 30-year Treasury bond yield, and
Damodaran’s monthly equity premium as at March
1, 2015. We believe this is representative of market
returns over a wide span evening out effects of such
12. Page 12
times as the Great Depression of the 1930s, the Dot
com bubble and the more recent 2008-2009
recession. In light of taking a long term view of
events and estimates, we used the 30-year Treasury
bond rate of 2.71% as the risk-free rate also.
Our DCF and Economic Profit models yielded a year-end
target price of $76.63. According to relative valuation
based on industry peer P/E and PEG ratios, BorgWarner
stock price is valued at $36.73 and $31.90 respectively
for 2015. The Dividend Discount model resulted in a price
of $55.32.
Our price target range however is $63 – 65, leading us to
a HOLD recommendation as this represents a modest
7.17% appreciation of the stock above the current price
and our target price. This price range is within ±$1.39 of
our target price of $64.39. We came by this price by
applying a 60-20-20 weighting to our DCF, DDM and
Relative Multiples valuation respectively. We assigned a
higher weighting to the DCF because it captures all the
assumptions that went into our analysis of the company,
its industry and the economy.
KEYS TO MONITOR
Our model is highly sensitive to growth estimates for
BorgWarner. We are likely to change our
recommendation if the company is unable to achieve the
8% and 7% growth forecasted for the Engine and
Drivetrain segments respectively in 2015.
Additionally, a simultaneous increase in oil prices and
interest rates will send a negative signal to consumers
and even though GDP growth fundamentals have not
changed severely, it may cause consumers to put of
purchasing new cars. This will not generate the resulting
demand for BWA products from OEMs. Therefore in the
near future, it will be important to monitor interest rates
and oil prices as these will affect the growth estimates
anticipated.
As the need for fuel efficient and low emission vehicles is
largely steered by regulations and standards, it will be
important to keep a close watch on what new standards
will be formulated in the near future, alongside keeping
track of progress and timelines towards implementation
of the Tier 3, China 5 and Euro 6 emissioin regulation
standards.
REFERENCES
1. Factset
2. BorgWarner 10-K for 2014
http://www.sec.gov/Archives/edgar/data/908255/0
00090825515000012/a10k12312014.htm#s6C670F
6671D751F68F6129208E408956
3. BorgWarner Corporate Website – News Releases
4. Global Transport Policy Data Website
http://transportpolicy.net/index.php?title=EU:_Ligh
t-duty:_Emissions
5. The Wall Street Journal – Demand Ebbs for Electric,
Hybrid Vehicles
http://www.wsj.com/articles/electric-hybrid-car-
demand-stalls-1409785123
6. Seeking Alpha – Electric Vehicles: Here to stay
http://seekingalpha.com/article/2982676-electric-
vehicles-here-to-stay?ifp=0
7. Congressional Budget Office – The Budget and
Economic Outlook 2015 to 2025
https://www.cbo.gov/sites/default/files/cbofiles/at
tachments/49892-Outlook2015.pdf
8. International Monetary Fund
http://www.imf.org/external/pubs/ft/survey/so/20
15/NEW012015A.htm
9. HIS – Automotive Industry Research Report
http://press.ihs.com/press-
release/automotive/average-age-vehicles-road-
remains-steady-114-years-according-ihs-
automotive
IMPORTANT DISCLAIMER
Henry Fund reports are created by student enrolled in
the Applied Securities Management (Henry Fund)
program at the University of Iowa’s Tippie School of
Management. These reports are intended to provide
potential employers and other interested parties an
example of the analytical skills, investment knowledge,
and communication abilities of Henry Fund students.
Henry Fund analysts are not registered investment
advisors, brokers or officially licensed financial
professionals. The investment opinion contained in this
report does not represent an offer or solicitation to buy
13. Page 13
or sell any of the aforementioned securities. Unless
otherwise noted, facts and figures included in this report
are from publicly available sources. This report is not a
complete compilation of data, and its accuracy is not
guaranteed. From time to time, the University of Iowa,
its faculty, staff, students, or the Henry Fund may hold a
financial interest in the companies mentioned in this
report.
14. BorgWarner Inc.
Key Assumptions of Valuation Model
Ticker Symbol BWA
Current Share Price $60.08
Current Model Date 5-Mar-15
Fiscal Year End Dec. 31
Steady State Growth 5.00%
10-Year Treasury Bond Rate 1.47%
Marginal Tax 31.18%
Average Depreciation 15.45%
R&D Expense 4.00%
Pre-Tax Cost of Debt 3.70%
Risk-Free Rate - 30 Yr Treasury 2.71%
Current Dividend Yield 0.85%
Inflation Rate 0.80%
Beta 1.467
Equity Risk Premium 4.85%
WACC 9.13%
Cost of Equity 9.82%
15. BorgWarner Inc.
Revenue Decomposition
Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E
Net Sales by Product Segment :
Engine 4,913.0 5,022.1 5,705.9 6162.4 6778.6 7320.9 7833.4 8342.5 8759.7
Drive Train 2,298.7 2,446.5 2,631.4 2815.6 3153.5 3468.8 3746.3 3989.8 4189.3
Intersegment Elimination -28.5 -32.0 -32.2 -38.6 -45.6 -52.9 -60.3 -67.5 -74.3
Total Net Sales 7,183.2 7,436.6 8,305.1 8,939.3 9,886.5 10,736.8 11,519.4 12,264.8 12,874.7
YEAR-ON-YEAR GROWTH
Net Sales by Product Segment :
Engine -2.7% 2.2% 13.6% 8.0% 10.0% 8.0% 7.0% 6.5% 5.0%
Drive Train 10.3% 6.4% 7.6% 7.0% 12.0% 10.0% 8.0% 6.5% 5.0%
Intersegment Elimination 39.7% 12.3% 0.6% 20.0% 18.0% 16.0% 14.0% 12.0% 10.0%
Total Net Sales 1.0% 3.5% 11.7% 7.6% 10.6% 8.6% 7.3% 6.5% 5.0%
Net Sales by Geography :
United States 1,857.2 1,939.7 2,008.1
Europe:
Germany 1,871.3 1,760.1 2,145.6
Hungary 448.9 451.5 518.1
United Kingdom 0.0 0.0 0.0
France 335.2 327.6 405.2
Other Europe 1,015.1 1,132.5 1,097.3
Total Europe 3,670.5 3,671.7 4,166.2
South Korea 505.6 563.5 623.0
China 499.1 636.3 885.1
Other Foreign 650.8 625.4 622.7
Total Net Sales 7,183.2 7,436.6 8,305.1
YEAR-ON-YEAR GROWTH
Net Sales by Geography :
United States 10.9% 4.4% 3.5%
Europe:
Germany -14.9% -5.9% 21.9%
Hungary -10.8% 0.6% 14.8%
United Kingdom 0.0% 0.0% 0.0%
France -7.7% -2.3% 23.7%
Other Europe 10.6% 11.6% -3.1%
Total Europe -7.9% 0.0% 13.5%
South Korea 7.2% 11.5% 10.6%
China 19.8% 27.5% 39.1%
Other Foreign 14.5% -3.9% -0.4%
Total Net Sales 1.0% 3.5% 11.7%
16. BorgWarner Inc.
Income Statement
Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E
Net sales 7,183.2 7,436.6 8,305.10 8,939.3 9,886.5 10,736.8 11,519.4 12,264.8 12,874.7
Cost of sales (excluding Depr. & Amortiation) 5,427.7 5,579.7 6,218.3 6,811.8 7,533.5 8,181.5 8,777.8 9,345.8 9,810.5
Depreciation & tooling 260.2 272.7 303.2 323.6 317.7 319.3 325.5 326.4 331.3
Amortization of intangible assets 28.4 26.7 27.2 23.6 23.7 24.7 25.1 25.2 24.9
Gross profit 1,466.9 1,557.5 1,756.4 1,780.4 2,011.6 2,211.4 2,391.0 2,567.4 2,708.0
Selling, general & administrative expenses 363.4 336.5 362.7 447.0 494.3 536.8 576.0 613.2 643.7
Net Research & Development 265.9 303.2 336.2 357.6 395.5 429.5 460.8 490.6 515.0
Restructuring expense 27.4 39.8 90.8 - - - - - -
Goodwill impairment charge - - - - - - - - -
Total other income (expense) 57.3 22.8 3.0 - - - - - -
Operating income (loss) 752.9 855.2 963.7 975.9 1,121.8 1,245.1 1,354.2 1,463.6 1,549.3
Equity in affiliates' earnings, net of tax (42.8) (43.5) (47.3) (48.0) (57.5) (63.6) (69.1) (74.1) (78.9)
Interest income (4.7) (4.8) (5.5) (5.93) (7.10) (7.85) (9.15) (9.74)
Interest expense & finance charges 39.4 34.2 36.4 49.6 39.5 35.6 35.9 42.5 45.8
Earnings before income taxes and noncontrolling interest 761.0 869.3 980.1 980.2 1,146.9 1,280.9 1,387.4 1,504.4 1,592.1
Provision (benefit) for income taxes 238.6 218.3 292.6 305.6 357.6 399.4 432.6 469.1 496.4
Net earnings (loss) 522.4 651.0 687.5 674.6 789.3 881.5 954.8 1,035.3 1,095.7
Net earnings attributable to the noncontrolling interest, net of tax (21.5) (26.7) (31.7) (28.3) (31.3) (34.0) (36.4) (38.8) (40.7)
Net earnings (loss) attributable to BorgWarner Inc. 500.9 624.3 655.8 646.3 758.0 847.6 918.3 996.5 1,054.9
Weighted average shares outstanding - basic 225.3 228.6 227.2 223.2 219.3 215.2 212.7 210.4 208.3
Net earnings (loss) per share - basic 2.23 2.73 2.89 2.90 3.46 3.94 4.32 4.74 5.06
Dividends per common share 0.33 0.25 0.51 0.61 0.73 0.83 0.91 0.99 1.06
Dividends Paid 73.4 57.2 115.8 135.7 159.2 178.0 192.9 209.3 221.5
Dividend Payout Ratio 0.15 0.09 0.18 0.21 0.21 0.21 0.21 0.21 0.21
22. BorgWarner Inc.
Weighted Average Cost of Capital (WACC) Estimation
Risk Free Rate 2.71%
Market Risk Premium 4.85%
Beta 1.467
Cost of Equity 9.82%
Risk Free Rate - 30 Yr US Treasury 2.71%
Corporate Spread - Investment Grade 0.99%
Pretax Cost of Debt 3.70%
Marginal Tax Rate 31.18%
After tax Cost of Debt 2.55%
Equity :
Stock Price $60.1
No. of Shares Outstanding $227.2
Market Value (Millions) $13,647.2
Debt:
PV of Operating Leases 63.7
Short Term Debt 623.7
Long term Debt 750.3
Total Value of Debt $1,437.7
Total Value $15,084.90
Equity Weight 90.5%
Debt Weight 9.5%
WACC 9.13%
Cost of Debt
Cost of Equity (CAPM)
Weights
23. BorgWarner Inc.
Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models
Key Inputs:
CV Growth 5.00%
CV ROIC 31.42%
WACC 9.13%
Cost of Equity 9.82%
Fiscal Years Ending Dec. 31 2015E 2016E 2017E 2018E 2019E 2020E
DCF Model
Free Cash Flow 713.8 715.9 752.2 879.2 944.8 979.2
Continuing Value 21639.3
Periods to Discount 1 2 3 4 5
Discounted Free Cash flow 654.1 601.1 578.8 619.9 14590.1
Sum of Discounted FCF 17043.9
Add:
Excess Cash 631.7
Investments & advances 403.3
Product Liability Insurance 111.8
Less:
Notes payable & other short-term debt 623.7
Product liabilities 111.8
Severance & Retirement related 390.5
Other payables & accrued expenses 74.4
Long-term debt 750.3
Cross-currency swaps & Derivatives 0.5
PV of Operating Leases 63.7
PV of Non-controlling Interest 74.7
Equity Value 16101.1
Shares Outstanding 227.2
Share Price @ Dec. 2014 70.88
Share Price Today 60.08
EP Model
Invested Capital 3092.0
Economic Profit 432.0 499.5 571.9 635.4 704.3 754
Continuing Value 18255.5
Periods to Discount 1 2 3 4 5
Discounted EP 395.8 419.4 440.0 448.0 12248.7
Sum of Discounted EP 13951.9
Invested Capital 3092
Add:
Excess Cash 631.7
Investments & advances 403.3
Product Liability Insurance 111.8
Less:
Notes payable & other short-term debt 623.7
Product liabilities 111.8
Severance & Retirement related 390.5
Other payables & accrued expenses 74.4
Long-term debt 750.3
Cross-currency swaps & Derivatives 0.5
PV of Operating Leases 63.7
PV of Non-controlling Interest 74.7
Equity Value 16101.1
Shares Outstanding 227.2
Share Price @ Dec. 2014 70.88
Share Price Today 60.08
Today 3/5/2015
Next FYE 12/31/2015
Last FYE 12/31/2014
Days in FY 365
Days after FYE 64
Elapsed Fraction 0.175
R* 8.98%
Price Today ( 2 months time elapse) $71.96
Target Year-end Price (Dec. 2015) 76.64$
24. BorgWarner Inc.
Dividend Discount Model (DDM) or Fundamental P/E Valuation Model
Fiscal Years Ending Dec. 31 2015E 2016E 2017E 2018E 2019E 2020E
EPS 2.90$ 3.46$ 3.94$ 4.32$ 4.74$ 5.06$
Key Assumptions
CV growth 5.0%
CV ROE 18.7%
Cost of Equity 9.8%
Future Cash Flows
P/E Multiple (CV Year) 15.2
EPS (CV Year) 5.06$
Future Stock Price 76.93$
Dividends Per Share 0.61 0.73 0.83 0.91 0.99
Discounting Periods 1 2 3 4 5
Discounted Cash Flows 0.55 0.60 0.62 0.62 48.77
Intrinsic Value 51.18$
Today 3/5/2015
Next FYE 12/31/2015
Last FYE 12/31/2014
Days in FY 365
Days after FYE 64
Elapsed Fraction 0.175
R* 8.98%
Price Today ( 2 months time elapse) $51.95
Target Year-end Price (Dec. 2015) 55.33$
25. BorgWarner Inc.
Relative Valuation Models
EPS EPS Est. 5yr
Ticker Company Price 2015E 2016E P/E 15 P/E 16 EPS gr. PEG 15 PEG 16
AXL American Axle & Manufacturing Holdings, Inc. $24.56 $2.67 $2.80 9.2 8.8 19.9 0.46 0.44
DAN Dana Holding Corporation $20.95 $2.13 $2.45 9.8 8.6 13.1 0.75 0.65
CMI Cummins Inc $137.95 $10.16 $11.16 13.6 12.4 12.2 1.11 1.01
DLPH Delphi Automotive PLC $77.64 $5.49 $6.37 14.1 12.2 13.6 1.04 0.90
HON Honeywell International Inc $101.17 $6.09 $6.77 16.6 14.9 10.0 1.66 1.50
JCI Johnson Controls Inc. $49.19 $3.61 $4.14 13.6 11.9 11.8 1.15 1.00
TEN Tenneco $55.65 $4.91 $5.66 11.3 9.8 12.4 0.91 0.79
TRW TRW Automotive Holdings Corporation $104.50 $7.96 $8.81 13.1 11.9 9.6 1.37 1.24
Average 12.7 11.3 1.1 0.9
BWA BorgWarner Inc. $60.08 $2.90 $3.46 20.7 17.4 10.4 2.0 1.7
Implied Value:
Relative P/E (EPS15) $ 36.73
Relative P/E (EPS16) 39.05$
PEG Ratio (EPS15) 31.90$
PEG Ratio (EPS16) 33.89$
26. BorgWarner Inc.
Key Management Ratios
Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E
Liquidity Ratios
Current Ratio
Current Assets/Current Liabilities
1.54 1.72 1.37 1.69 1.83 1.95 2.08 2.22 2.39
Quick Ratio
Current Assets - Inventories/Current
Liabilities
1.26 1.44 1.14 1.37 1.49 1.60 1.75 1.90 2.07
Cash Ratio
Cash & Cash equivalents/Current Liabilities
0.45 0.58 0.37 0.44 0.51 0.61 0.82 0.99 1.17
Activity or Asset-Management Ratios
Total Asset Turnover
Net Sales/Avg. Total Assets
1.16 1.12 1.17 1.22 1.29 1.31 1.29 1.25 1.21
Inventory Turnover
Cost of Sales/Avg. Inventory
12.04 12.32 12.90 12.33 11.95 11.86 11.79 11.83 11.83
Financial Leverage Ratios
Debt Ratio
Long-term Debt/Total Assets
0.13 0.15 0.10 0.12 0.12 0.11 0.11 0.10 0.10
Equity Multiplier
Total Assets/Total Equity
2.03 1.90 1.96 1.90 1.87 1.84 1.83 1.79 1.74
Times Interest Earned
Operating Income/Interest Expense & Fin.
Charges
19.11 25.01 26.48 19.68 28.40 34.98 37.70 34.45 33.80
Profitability Ratios
Gross Profit Margin
Gross Profit/Net Sales
20.42% 20.94% 21.15% 19.92% 20.35% 20.60% 20.76% 20.93% 21.03%
Net Profit Margin
Net Income/Net Sales
7.27% 8.75% 8.28% 7.55% 7.98% 8.21% 8.29% 8.44% 8.51%
ROA
Net Income/Avg. Total Assets
8.45% 9.78% 9.72% 9.19% 10.29% 10.77% 10.69% 10.56% 10.30%
ROE
Net Income/Avg. Total Equity
16.60% 17.92% 18.63% 17.22% 18.67% 19.17% 18.64% 18.13% 17.27%
Payout Policy Ratios
Dividend Payout
Dividends/Net Income
14.66% 9.15% 17.66% 21.00% 21.00% 21.00% 21.00% 21.00% 21.00%
Retention Ratio
(Net Income-Dividends)/Net Income
85.34% 90.85% 82.34% 79.00% 79.00% 79.00% 79.00% 79.00% 79.00%
Total Payout
(Dividends + Treasury Repurchases)/Net
Income
-12.87% 34.46% 33.68% 67.42% 60.58% 56.40% 42.78% 41.07% 39.96%