What happened

Shares of BorgWarner (BWA 1.50%) gained 12.4% last month, according to data provided by S&P Global Market Intelligence. The stock is down 36% over the last five years, as the company deals with a weak industry backdrop for automotive powertrain components. It has managed to grow sales over that time period, but not enough to justify a higher valuation, which is the main reason the stock has fallen.

But one analyst with Nomura initiated coverage of the stock last month with a buy rating. The analyst cited BorgWarner's continued sales outperformance relative to the industry, the expectation for higher margins, and relatively low exposure to the trade wars. 

A car sitting on a ramp with a clear view of the drivetrain underneath.

Image source: Getty Images.

So what

So far this year, the company has struggled to grow sales in the midst of a volatile environment for light-vehicle production in China. Additionally, higher supply chain costs and tariffs caused adjusted operating margin to fall to 11.9% in the second quarter, versus 12.7% last year. But the powertrain supplier has been known for its cost discipline and innovation, which is why investors are giving BorgWarner the benefit of the doubt in this difficult environment. 

It is also a leader in efficient and clean combustion technology, something that is increasingly being required around the world given regulations for clean energy. During the company's second-quarter conference call, CEO Frederic Lissalde said: "We can develop, specify, and manufacture all the major components of a battery-electric vehicle propulsion system. Our product breadth is really our advantage." 

Now what

Management expects to grow sales and earnings through 2023, which supports the investor confidence in the last month. The company is calling for revenue growth of about 6% per year, as demand returns to the market. If management can improve margins, the stock could be a steal at these levels. Currently, investors can buy a share for a forward price-to-earnings ratio of just 8.5 times next year's earnings estimate.