Foolish Forecast: Return of the Borg

Beware the Borg? Pshaw. Love the Borg, I say. Over the past 52 weeks, auto-parts industry powerhouse BorgWarner's (NYSE:BWA) stock is beating the S&P 500 by nearly a 20% margin. (Yes, I did use "auto industry" and "beating the S&P" in the same sentence, and no, it's not a typo.) How can any company accomplish this feat in the current market environment, and how is Borg, in particular, managing this? Read all about it in tomorrow's Q1 2006 earnings release.

Or if you like, click here to read how Motley Fool Stock Advisor co-analyst Tom Gardner predicted this very feat more than three years ago when he recommended BorgWarner to our subscribers. For the record, Tom predicted a double within 36 months -- and 38 months later, the stock is up 125%.

What analysts say:

• Buy, sell, or waffle? Sixteen analysts follow BorgWarner. Surprisingly for an auto industry stock, most of them love it. The stock gets nine buy ratings and seven holds.
• Revenues. Analysts will be looking for news of a 6% increase in sales, year over year. The target is $1.15 billion.
• Earnings. Profits are predicted to be up 8% to $1.05 per share.

What management says:
Commenting on the company's performance in 2005, CEO Tim Manganello explained in the February earnings report that Borg's success derives from its concentrating on the "fastest-growing parts of the market" and, in particular, on improving fuel economy and minimizing vehicle emissions.

Anyone who's picked up a newspaper in the past few years knows that government, industry, environmentalists, and consumers alike are all interested in getting cars to go further on a tank of high-priced gasoline and to emit as little smog and as few greenhouse gases as possible in the process. This strategy of Borg's hasn't just been politically correct -- it's also helped to boost the company's sales by 21% year over year in the past six months, even as some of Borg's biggest customers in Detroit slash production.

What management does:
Over the last year, Borg steadily expanded its gross margin despite the rising costs of raw materials. This improvement hasn't made itself felt further down the income statement, however, as Borg's selling, general, and administrative costs ate into the savings, rising 44% over the past six months. The company's rolling net margins have been hurt worst of all as a result of a $46 million legal settlement charge recorded in Q2 of last year.

The Fool says:
In the December Stock Advisor update, Tom Gardner both commended Borg for its performance and warned subscribers to be wary of the stock. He noted that the company remains very strong in a field in which competitors are failing left and right -- which raises the possibility of additional market share gains for Borg. But he also expressed concern over Borg's balance sheet and its working-capital management.

On this latter point, there's been both good and bad news of late. On the good-news front, Borg is paying down its debt steadily. On the bad, Borg's cash reserves are also falling, and inventory and accounts receivable growth -- up 53% and 30%, respectively -- continue to outpace the 21% sales growth noted above. I'd suggest that Fools keep an eye on all of these lines tomorrow, and in the quarters going forward.

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Fool contributor Rich Smith does not own shares of any company named above.