This Borg Is Too Pretty

After hitting its all-time high two weeks ago, BorgWarner's (NYSE: BWA  ) stock struck a bit of a bump. Although second-quarter earnings weren't bad (Borg reported "record" sales and earnings last week), the shares are currently trading a good 8% lower than at their July 16 peak. If business is booming, why are investors selling the shares?

The good news
Last Wednesday, Borg reported $1.29 per share in profits, up 7% from last year's Q2. Its $1.36 billion in sales beat out estimates by more than $100 million. And as the piece de resistance, Borg promised further good news down the road, adding a dime to its full-year earnings guidance. And if all that sounds good to you, you're not alone. Borg CEO Tim Manganello described the results as "outstanding."

Once again, the tough U.S. auto sales environment found that "resistance was futile" when faced with the Borg's market-share-grabbing ways. As production in the Ford- (NYSE: F  ) , General Motors- (NYSE: GM  ) , DaimlerChrysler- (NYSE: DCX  ) dominated U.S. fell 3%, Borg's U.S. sales grew 2% -- clear evidence of growing share. And the Borg flexed its muscle even further in the healthier auto markets abroad. There, sales to more robust automakers such as Toyota (NYSE: TM  ) and Honda (NYSE: HMC  ) leapt 20% year over year -- and these non-U.S.-dollar sales provided bumper profits back home, when translated into deflated greenbacks.

The bad news
So what's not to like, you ask? And I repeat -- it's the valuation. So far this year, Borg has generated $100.9 million in free cash flow. While a 15% improvement over last year's H1 performance, that's still significantly below GAAP net earnings. Moreover, if you project out that H1 performance to get a run rate on Borg's free cash flow for the year, you'll see that Borg currently trades for roughly 25 times its run rate of $202 million.

That's an awful lot of money to pay for a firm growing free cash flow at 15% per year. So say it with me, Fools, one more time: Great company, lousy stock price.

Track the Borg's progress with:

• Foolish Forecast: Borg's Back
• Foolish Forecast: Can Borg Bounce Back?
• Resisting BorgWarner Is Futile: Fool by Numbers

Fool contributor Rich Smith does not own shares of any company named above. BorgWarner is a Motley Fool Stock Advisor recommendation. The Motley Fool's disclosure policy serves the collective good.