Please ensure Javascript is enabled for purposes of website accessibility

BorgWarner Earnings Results Good, but Commentary Raises Concerns

By Lee Samaha - Apr 29, 2016 at 1:14PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The automotive sector and its leading players like Volkswagen face an uncertain future in 2016, and this fact plays on prospects for automotive suppliers.

Having disappointed the market by failing to meet guidance in 2015, the onus is on BorgWarner's (NYSE: BWA) management to restore confidence in their forecasting -- which goes a long way toward explaining the cautionary tone taken by CEO James Verrier during Thursday's earnings call. The first-quarter earnings themselves were good, and despite some operational disappointments, management of the auto parts supplier kept full-year earnings guidance intact. On the other hand, when any company's leadership says current risks outweigh opportunities, investors will want to take notice. Let's take a closer look at the quarter and what was said.

BorgWarner's first quarter: The raw numbers
The headline figures:

  • First-quarter sales of $2.269 billion compared to a guidance range of $2.149 billion to $2.248 billion.
  • First-quarter net non-GAAP EPS of $0.80 compared to a guidance range of $0.75 to $0.79.

In short, it was a good quarter for BorgWarner, and second-quarter guidance is positive:

  • Second-quarter net sales growth is expected to be in the 10.6%-to-16% range.
  • Excluding the impact of foreign currency and the Remy acquisition, net sales growth is expected to be 1.5% to 4.8%.
  • Net diluted EPS is expected to be in the $0.78-to-$0.83 range, including $0.03 from the Remy acquisition.

As you probably could surmise, BorgWarner's results have a lot of moving parts: foreign currency issues, acquisition adjustments, integration costs, restructuring expenses, tax adjustments, etc. You get the picture. That said, let's look closely at the subtle change in full-year guidance:

  • Full-year net sales are now expected to be in a range of $8.879 billion to $9.253 billion, implying growth of 12.7% to 17.5%, compared to a previous estimate for 13.2% to 18.3% growth.
  • Excluding foreign currency headwinds and the impact of the Remy acquisition, net sales growth is still expected to be 2.5% to 5.5%.
  • Net diluted EPS is still expected to be in the range of $3.11 to $3.32, including $0.12 from Remy.

As noted earlier, the earnings guidance remains the same. The slight reduction in full-year net sales is primarily due to "lower growth expectations from Remy's commercial vehicle business."

But here's the thing: The key takeaway from the earnings is not so much about the slight reduction in sales growth. It's more about what it represents -- the potential for more disappointment down the line.

Risks outweighing opportunities
Verrier's remark, "I would say the risks a little outweigh the opportunities as we see the world at this point," is clearly intended to reflect the key uncertainties facing BorgWarner and the automotive market in 2016:

  • Ongoing weakness in the commercial vehicle market, a key sector for BorgWarner.
  • Outlook for vehicle sales in China now that the initial impact of government incentives there has hit.
  • Whether North American car sales have hit a plateau, and if so, what it implies for car inventory reductions going forward.
  • The impact of the previous two points on its biggest customer, Volkswagen

Weak commercial vehicle sales are part and parcel of the current dichotomy in the global economy -- consumer spending is good, business spending is bad -- and Verrier served notice that some of the new programs the company had targeted in recent years were "coming into question and review."

Turning to vehicle sales in China and North America, as you can see from the graph below, vehicle sales in China received a boost from tax-cut stimulus at the end of 2015, but it's unclear whether that will cause a pull-forward effect leading to a future sales decline. Similarly, U.S. vehicle sales look like they have peaked.


BorgWarner's biggest customer, Volkswagen, has obviously had issues during the last year, but on the same day BorgWarner gave its results, the German car company's management offered a surprisingly bullish outlook for 2016. Said Volkswagen CEO Michael Muller:

We are not letting the crisis slow us down, but are stepping on the gas -- in all of our brands, and in all relevant markets. All in all, from today's perspective we have good chances of again recording solid growth in our operating business in 2016.

It's good for BorgWarner investors to hear positivity from Volkswagen, but the market will want to see that optimism confirmed in the automaker's sales figures over the next few quarters.

Looking ahead
BorgWarner's first-quarter results were solid enough, but as management pointed out, the coming quarter is likely to indicate the direction of the global auto market in 2016.

Looking at it from a "glass half-empty" perspective would suggest that Verrier's cautionary commentary could prelude disappointment in future quarters, but those with a "glass half-full" perspective will take heart from management's confidence that it will hit its guidance, and also see the upside should the auto market positively surprise in 2016.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

BorgWarner Inc. Stock Quote
BorgWarner Inc.
$39.46 (5.37%) $2.01
Volkswagen Aktiengesellschaft Stock Quote
Volkswagen Aktiengesellschaft
$20.27 (1.91%) $0.38

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/18/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.