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Goldman Sachs Downgrades BorgWarner to a ‘Neutral’

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Price movement

BorgWarner (BWA) has a market cap of $7.7 billion. It fell 2.2% to close at $35.51 per share on October 6, 2016. The stock’s weekly, monthly, and year-to-date (or YTD) price movements were 3.5%, -1.7%, and -16.9%, respectively, on the same day.

BWA is trading 1.7% above its 20-day moving average, 3.7% above its 50-day moving average, and 4.4% above its 200-day moving average.

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Related ETF and peers

The First Trust Large Cap Value AlphaDex ETF (FTA) invests 0.56% of its holdings in BorgWarner. The ETF tracks an index that selects and weights value stocks from the S&P 500 Value Index using fundamental factors such as sales, book value, and cash flows. The YTD price movement of FTA was 11.5% on October 6.

The market caps of BorgWarner’s competitors are as follows:

  • Cummins (CMI) — $22.0 billion
  • Lear (LEA) — $8.9 billion
  • Tenneco (TEN) — $3.4 billion

BorgWarner’s rating

Goldman Sachs has downgraded BorgWarner’s rating to a “neutral” from a “buy.” It’s also reduced the stock’s price target to $35.0 from $37.0 per share.

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Performance of BorgWarner in 2Q16

BorgWarner reported 2Q16 net sales of $2.3 billion, a rise of 15.0% compared to net sales of $2.0 billion in 2Q15. Sales of its Engine and Drivetrain segments rose 2.2% and 42.8%, respectively, in 2Q16 compared to 2Q15. The company’s gross profit margin and operating income rose 1.0% and 11.1%, respectively, in 2Q16 compared to 2Q15.

BWA’s net income and EPS (earnings per share) rose to $164.4 million and $0.76, respectively, in 2Q16, compared to $148.1 million and $0.65, respectively, in 2Q15. It reported non-GAAP (generally accepted accounting principles) EPS of $0.84 in 2Q16, a rise of 12.0% compared to 2Q15.

BWA’s cash fell 14.3%, and its inventories rose 2.9% in 2Q16 compared to 4Q15. Its current ratio rose to 1.34x, and its long-term debt-to-equity ratio fell to 0.56x in 2Q16, compared to its current and long-term debt-to-equity ratios of 1.33x and 0.58x, respectively, in 4Q15.

Projections

BorgWarner has made the following projections for 3Q16:

  • net sales growth in the range of 13.0%–20.8%
  • net sales growth in the range of 2.5%–7.7%, excluding the impact of foreign currencies and its Remy acquisition
  • EPS in the range of $0.74–$0.81, including ~$0.03 per share contributed by its Remy acquisition

The company has made the following projections for 2016:

  • net sales growth in the range of 13.7%–17.5%
  • net sales growth in the range of 3.0%–5.5%, excluding the impact of foreign currencies and its Remy acquisition
  • EPS in the range of $3.16–$3.32, including ~$0.12 per share contributed by its Remy acquisition

In the next article, we’ll discuss Lear (LEA).

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