True to form, BorgWarner (NYSE:BWA) did indeed bounce back last quarter. As we head into the auto parts maker's Q1 2007 earnings announcement, due tomorrow, the question becomes: Is it here to stay?

What analysts say:

  • Buy, sell, or waffle? Fifteen analysts now follow BorgWarner, down one from last quarter, and they're less optimistic to boot. Only six say "buy," with the rest rating the Borg a hold.
  • Revenues. On average, the analysts expect 7% sales growth to $1.24 billion.
  • Earnings. Profits are predicted to rise 9% to $1.16 per share.

What management says:
In last quarter's earnings release, CEO Tim Manganello painted the picture of one company with two businesses. The first, in the U.S., serves an auto industry in decline, where vehicle production fell 3% last year. This business is restructuring and laying off workers to compensate. The second business serves a worldwide economy in which vehicle production rose 3% last year, and it's investing to serve the needs of automakers in Europe and Asia.

What management does:
Setting aside its better-than-expected fourth quarter of 2006, Borg's financial results have recently reflected its dilapidated U.S. business. Rolling gross margins have fallen steadily for four straight quarters, and operating and net margins have followed suit for the last two quarters. Reviewing the last half of fiscal 2006 to see where margins fell short, we see that sales were up 8% on average, while the cost of goods sold rose 10%, and operating costs climbed 11%. The company's $85 million in restructuring charges didn't help matters on the bottom line.





























All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
Peering into the depths of fiscal 2007, we've got a little more of the same for you -- but also some good news. Manganello confided that restructuring efforts are ongoing in the U.S., with a drivetrain plant in Muncie, Ind., next slated for closure. He also warned of a need to "adjust" -- which I interpret as "write down" -- "the carrying value of other assets, primarily related to our four-wheel drive transfer case product line." So expect more charges to earnings in the near future.

Yet on the bottom line, Borg actually raised its guidance for fiscal 2007 in February. According to Manganello, the restructuring efforts taken so far will permit the firm to report $0.10 per share in higher profits than previously anticipated. As a result, the firm's looking for about 8% sales growth, mid-8-percent operating margins, and $4.80 per share in profits this year.

Personally, as much as I like this company, Borg's shares look a little pricey to me today. Ignoring projected earnings for this year, and focusing instead on the company's actual earnings from the last 12 months, Borg sells for a price-to-earnings-to-growth (PEG) ratio of 1.8. That's about a 50% premium to the 1.2 PEG that Canada's Magna (NYSE:MGA) commands, and even more expensive than Cummins (NYSE:CMI), which at a 12 P/E and 11% projected growth, scores just a 1.1 PEG. If Fool co-founder Tom Gardner hadn't fixed his seal of approval to Borg as a Motley Fool Stock Advisor recommendation -- but not endorsed the other two -- I'd be inclined to think either of Borg's rivals the better bet.

That is to say, unless Borg wows the critics tomorrow. Fingers crossed.

What did we expect out of BorgWarner last quarter, and what did it produce? Find out in:

Fool contributor Rich Smith does not own shares of any company named above. The Fool has a disclosure policy.