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Why Shares in BorgWarner Soared in April

By Lee Samaha - Updated May 2, 2020 at 8:18PM

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It was a highly eventful month for the automotive supplier.

What happened

Shares in automotive technology company BorgWarner (BWA 2.30%) rose by 17.2% in March, according to data provided by S&P Global Market Intelligence. The move marked a bounce in confidence in the marketplace regarding prospects for the global economy in 2020.

More specifically, there's growing evidence that the pandemic is being contained and governments around the world are ready to relax restrictions on their economies. That's good news for the automotive sector, as it's been one of the hardest-hit industries in 2020. As an automotive supplier, BorgWarner needs light vehicle sales/production to bounce back.

Half-built cars in a production line.

Image source: Getty Images.

It's also been a highly eventful month for BorgWarner. The company ended March sending a written notice to its acquisition target Delphi Technologies, noting that the latter had breached the terms of their transaction agreement by drawing down revolving credit without the prior agreement of BorgWarner. Delphi responded by disputing BorgWarner's assertion.

If that wasn't enough, one of BorgWarner's factories was hit by a tornado, which damaged the facility and killed a security guard. 

So what

According to reports, BorgWarner and Delphi are still working toward a deal, but there's no assurances over it and the friction created by Delphi's actions is obviously going to complicate matters. Meanwhile, the factory damaged by the tornado is expected to resume production -- albeit on a limited basis initially -- in early May. 

US Total Light Vehicle Sales Chart

Data by YCharts.

Now what

BorgWarner find itself in an interesting position. By the end of the year it could find itself owning Delphi, having bought it at a cyclical low for the automotive industry. As you can see in the chart above, light vehicle sales had already been in decline going into 2020, and the hope was that 2020 would mark a trough. Going forward, the idea is that auto sales will recover sharply in a post-COVID-19 world, leading to a slow and gradual recovery in auto sales.

An alternative scenario is that the measures taken to contain the virus are going to have far-reaching repercussions on the economy, which will slow consumer discretionary spending for some time. That would be bad news for automotive companies, and definitely bad news for BorgWarner as it absorbs Delphi.

Time will tell which scenario ends up being more accurate. 

Lee Samaha has no position in any of the stocks mentioned. The Motley Fool recommends BorgWarner. The Motley Fool has a disclosure policy.

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BorgWarner Inc. Stock Quote
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$38.74 (2.30%) $0.87
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