It's been a strange year for powertrain engineering company BorgWarner Inc. (NYSE:BWA). Following the lowering of its 2016 through 2018 growth outlook at a conference in January, the company has pretty much executed according to plan, but its stock is still down significantly on the year. In truth, the stock price movements of automobile suppliers are always going to be subject to sentiment on future production growth. In this vein, let's take a look at BorgWarner's third-quarter results and guidance for the auto industry.
BorgWarner Q3 results: The raw numbers
Since BorgWarner's purchase of electrical components manufacturer Remy International has had a significant impact on results, I've included acquisition-adjusted figures below.
- U.S. GAAP net sales increased 17.5% to $2.214 billion, compared to a forecast of 13% to 20.8% growth.
- Excluding foreign currency and acquisitions, net sales were up 6.1%, in the upper end of the forecast range of 2.5% to 7.7% growth.
- Non-GAAP net earnings per share of $0.78 fell comfortably within the forecast range of $0.74 to $0.81.
In addition, the all-important full-year guidance looks pretty good:
- Full-year net sales growth is forecast to fall in the range of 15.2% to 16% compared to a previous forecast for 13.7% to 17.5% growth, which results in the same figure at the midpoint.
- Excluding foreign currency and acquisitions, full-year net sales growth is forecast to be in the range of 4.3% to 4.8%, compared to the previous forecast range of 3% to 5.5%.
- Full-year net earnings per share are now expected to be in the $3.24 to $3.28 range, compared to a previous forecast range of $3.16 to $3.32 per diluted share.
Observant readers will note that the increase in underlying sales growth (ex foreign currency and acquisitions) is not matched by an increase in headline net sales growth. According to CFO Ron Hundzinski, this is because of a "weaker outlook for Remy sales ... primarily in the commercial vehicle and the aftermarket business."
Similarly, while the hike in full-year net earnings is a good thing, Hundzinski said that "an improved outlook on the impact of currency and a lower share count are driving the change."
All told, it's fair to say BorgWarner is pretty much on track with previous expectations, at least in terms of numbers.
It's useful to break out BorgWarner's numbers by segment, and as you can see below, underlying growth is good in both segments. The drivetrain results look spectacular, but it's important to note that last year's Q3 drivetrain sales were negatively impacted by a slow ramp-up in production by a major U.S. customer.
||Adjusted Sales Growth||Adjusted EBIT||Adjusted EBIT Growth|
|Engine||$1.359 billion||3.8%*||$218 million||2.8%*|
|Drivetrain||$866 million||11.4%**||$87 million||14.3%*|
All told, both segments put in a solid performance.
What management said on the earnings call
CEO James Verrier chose to highlight three areas with particular relevance to BorgWarner:
- North American auto production cycle
- Diesel penetration in Western Europe (the company is a major manufacturer of turbochargers for diesel engines)
- China's auto production growth as the incentives fade
The fear with the U.S. production cycle is that auto sales have peaked, and that production growth will slow. Indeed, Alcoa recently reduced its forecast for North American automotive production growth in 2016 from a range of 1% to 4% to a range of 1% to 2%, and Illinois Tool Works management took pains to describe its ability to grow even given a flattening of auto manufacturing growth.
Meanwhile, Alcoa increased its forecast for automobile production growth in China, partly due to the impact of tax incentives and regulations there. The measures have certainly stimulated the Chinese market so far this year, but Verrier is looking out to see where growth will go after the incentives are phased out.
The company delivered a solid set of results, but investors will be looking out to see how global auto sales and production are shaping up in the next year or so. BorgWarner is pretty much on track to meet its previous expectations, so execution is fine, but all eyes will remain focused on auto sales and the possible impacts of a shift in the auto sales mix on its prospects.