The strengthening U.S. dollar claimed its latest victim when powertrain specialist BorgWarner (NYSE:BWA) gave its earnings on Thursday. The company missed analyst estimates for revenue and earnings in the quarter, and management was forced to reduce its full-year guidance. The market immediately sold the stock off, but as ever, long-term investors need to focus on the underlying trends in the report. Let's take a more detailed look.
BorgWarner gives results
The headline numbers:
- First-quarter net sales of $1.98 billion versus analyst estimates of $2.14 billion
- First-quarter non-GAAP EPS of $0.78 versus analyst estimates of $0.84
- Full-year net sales growth guidance of negative 4% to 0% versus previous guidance of 2% to 6%
- Full-year diluted EPS guidance of $3.10 to $3.30 versus previous guidance of $3.35 to $3.55, and analyst estimates of $3.43
The figures tell a disappointing story of earnings and revenue coming in lower than expectations for the first quarter. In addition, full-year guidance was lowered. It's never good news when a company reduces guidance, but what were the reasons here?
What went wrong
In a nutshell, management put the earnings miss down to two separate issues. First, the stronger U.S. dollar -- which reduces the U.S.-dollar value of foreign currency earnings -- resulted in a decrease in "net sales by approximately $222 million" and a decrease "in net earnings by approximately $0.09 per diluted share in first quarter 2015 compared with first quarter 2014."
If you add these figures back to the actual net sales and earnings numbers above, then they would have come in at $2.21 billion and $0.87, respectively -- both ahead of analyst estimates. Of course, analysts adjust for currency movements, but even if you compare this with the analyst EPS consensus of 90 days ago of $0.87, then BorgWarner's currency-adjusted earnings were in line.
Second, in the earnings release, management discussed a couple of issues that it believes are temporary: "our growth was temporarily affected by an unfavorable mix of light vehicle production in North America and launch delays in Asia. We believe these issues are short term and should not impact our full year growth expectations."
Indeed, management's view that its "full year growth expectations" wouldn't change is reflected in its guidance for net sales growth, excluding currency impacts, to be in the range of 9.5% to 12% -- the same as its previous guidance.
BorgWarner reports out of two segments. The engine segment produces turbo systems, emission products, and thermal systems (used for improving engine cooling and reducing fuel consumption), while the drivetrain segment provides transmission systems (including clutch components and systems) and torque distribution and management systems.
For the second quarter in a row, results in the drivetrain segment were somewhat disappointing. I've summarized the key data for the current quarter in a table below.
Readers should note that the adjusted sales and earnings before interest and taxation, or EBIT, numbers exclude nonrecurring items. (Adjusted figures marked with an asterisk are the same, but also include adjustment for foreign currency effects.) As you can see, whichever way you look at it, drivetrain sales were disappointing.
|Segment||Reported Sales |
|Reported Sales Growth||*Adjusted Sales Growth||Adjusted EBIT |
|*Adjusted EBIT |
It's always disappointing when a company lowers EPS guidance, but management maintained its underlying net sales growth targets for 9.5% to 12% growth. If BorgWarner hits these targets and the U.S. dollar weakens, then don't be surprised if earnings estimates are raised in future.
However, these figures include an assumption that the non-currency issues discussed in the first quarter -- unfavorable sales mix in North America and launch delays in Asia -- will be rectified in due course. There is no guarantee that this will happen, so investors might be justified in pricing in a little more risk.