BorgWarner Gets Back on Track

The market received BorgWarner's (BWA 0.79%) latest fourth-quarter results well, and after a very difficult 2015, investors will be hoping the company has turned the corner in 2016. Having disappointed the market by lowering its 2016-2018 growth expectations at a conference in January, BorgWarner saw earnings and revenue come in ahead of internal guidance in its most recent set of results. Let's take a look at what happened.

BorgWarner's fourth-quarter results: The raw numbers
Net sales of $2.12 billion in the fourth quarter were a 6.6% increase compared with the same quarter last year but were positively affected by the acquisition of Remy International (alternators, starter motors, and electric traction motors) and negatively affected by the stronger U.S. dollar. No matter -- even when adjusted for acquisitions and currency, net sales were up 7.1% in the fourth quarter.

The revenue line compares favorably with management's guidance. For example, at the time of the third quarter, management forecast full-year sales to decline 5% to 6%, but thanks to a stronger-than-expected fourth quarter, full-year net sales were down only 3.4%.

Meanwhile, net EPS excluding non-comparable items of $3.02 was ahead of management's guidance range of $2.95 to $3.

Management reiterated the guidance it gave at the Deutsche Bank Auto Industry Conference in January:

• First-quarter net sales in the range of $2.149 billion to $2.248 billion.
• First-quarter net EPS in the range of $0.75 to $0.79.
• Full-year net sales growth in the range of $8.887 billion to $9.281 billion, implying growth of 13.2% to 18.3%, or 2.5% to 5.5% excluding currency and acquisition impacts.
• Full-year net EPS in the range of $3.11 to $3.32, or $2.98 to $3.18 excluding acquisitions.
  

For reference, management is forecasting revenue growth to compound by 4% to 6% annually between 2016 and 2018, so the 2.5%-to-5.5% figure for 2016 looks a little light. Clearly, expectations are for stronger organic growth in the next couple of years.

What happened with BorgWarner this quarter
A breakout of segment earnings reveals good underlying growth in the quarter.

DATA SOURCE: BORGWARNER INC. PRESENTATIONS. *ADJUSTED FOR CURRENCY. **ADJUSTED FOR CURRENCY AND REMY ACQUISITION.

However, segment earnings give only part of the picture. The fourth quarter saw reported earnings hit by increased restructuring expenses, pension settlement costs, and merger and acquisition expenses. The key highlights compared with last year's fourth quarter:

• Fourth-quarter adjusted EBIT of $311.6 million, a 6.1% increase.
  
• Restructuring expense of $24.4 million, up 5.2%.
• Pension settlement costs of $25.7 million, compared with $0.4 million in the same period last year.
• Merger and acquisition costs of $17.9 million.
• Corporate costs of $31.4 million, compared with $36.1 million last year.
• Interest expense of $17.8 million, up from $10.2 million last year.

Ultimately, reported net earnings attributable to BorgWarner was $125.3 million, a 10.4% decline. All told, underlying growth is a lot stronger than the headline numbers suggest.

On the earnings call, CEO James Verrier outlined three areas the company is paying attention to in 2016:

• China's automobile production growth, specifically the impact of government incentives in keeping car sales growing.
• Global commercial vehicle sales -- an area of disappointment in 2015.
• Developments at its largest customer, Volkswagen.

Looking ahead
From an investor's perspective, there are two key considerations. First, as discussed previously, BorgWarner has lowered its mid-term growth projections primarily because of issues with launch, timing, and volume cadence. In addition, a weaker macroeconomic outlook negatively affected its 2016-to-2018 guidance. Indeed, investors will have to keep an eye out for automobile production rates in 2016.

Second, there are also more complex and systemic questions here. For example, the company has been investing heavily in products to take advantage of the electrification of the powertrain. Will lower oil prices curtail the growth of electrified vehicles? Moreover, will BorgWarner suffer earnings shortfalls in the electrified world because its most important products are currently diesel and gas turbochargers?

BorgWarner's stock prospects in 2016 depend on the company delivering on its numbers, but they also depend on the demonstration that its mid- to long-term prospects remain on track.