The market is off to a shaky start this week, as the market digested less impressive earnings results from companies like Caterpillar (CAT), along with gloomy forecasts from Nvidia (NVDA). A slowing economic climate in China was cited as a big cause in both cases, which fueled concerns that the longer trade concerns last, the more slowing growth in that region will have a ripple effect throughout the world, including the United States.
At the same time, trade talks continue between the U.S, and China, and with a March deadline looming before the U.S. hikes the rate of a number of its tariffs from 20% to 25%, I think that any effort to continue working towards a compromise are going to continue to be taken as a positive sign. I also believe that any kind of practical compromise between the two nations will provide the markets with a reason to find some bullish momentum and rally higher. I agree with the contention that I’ve seen a lot of analysts and economists make, which is that neither country is going to benefit from a long-term trade war, and there are ultimately far more reasons for them to reach a compromise than to keep drawing things out. To me, that means the question isn’t so much whether a deal will be reached, but when.
A resolution of trade concerns should have a dynamic impact on a lot of industries, including the auto industry. Rather than focusing on auto makers specifically, though, I think the best opportunities from a value perspective really come from the companies that supply automakers with the parts and components they need. BorgWarner Inc. (BWA) Is a company you might not have heard about, but is a component of the S&P 500 Index, and that has a global footprint that is expanding its reach in Europe and working hard to do the same in China. Most industry experts think that is something that is going to put BWA at a competitive advantage in the long-term. Assuming that is correct, the stock’s fundamentals and value proposition right now really make this a stock that you would foolish not to pay attention to right now.
Fundamental and Value Profile
BorgWarner Inc. is engaged in providing technology solutions for combustion, hybrid and electric vehicles. The Company’s segments include Engine and Drivetrain. The Engine segment’s products include turbochargers, timing devices and chains, emissions systems and thermal systems. The Engine segment develops and manufactures products for gasoline and diesel engines, and alternative powertrains. The Drivetrain segment’s products include transmission components and systems, all-wheel drive (AWD) torque transfer systems and rotating electrical devices. The Company’s products are manufactured and sold across the world, primarily to original equipment manufacturers (OEMs) of light vehicles (passenger cars, sport-utility vehicles (SUVs), vans and light trucks). The Company’s products are also sold to other OEMs of commercial vehicles (medium-duty trucks, heavy-duty trucks and buses) and off-highway vehicles (agricultural and construction machinery and marine applications. BWA has a current market cap of about $8.5 billion.
- Earnings and Sales Growth: Over the last twelve months, earnings increased a little over 5%, while revenues increased about 2.5%. Both numbers turned lower in the most recent quarter, which isn’t something that has been unusual in the auto industry over that period. The company’s margin profile shows that Net Income as a percentage of Revenues improved from about 5.25% over the last twelve months to 8.2% in the last quarter.
- Free Cash Flow: BWA’s free cash flow is adequate, at $552 million. This number has improved significantly since the last quarter of 2015, when it dropped below $150 million; after it declined in each of the first two quarters of 2018 from a high at the end of 2017 at about $620 million, it did improve in the most recent quarter..
- Debt to Equity: A has a debt/equity ratio of .50. This is a very manageable number, however it is also worth noting that the company has almost $2.1 billion in debt versus a little over $361 million in cash and liquid assets as of the last quarter. The company’s balance sheet indicates their operating profits are more than adequate to service the debt they have.
- Dividend: BWA’s annual divided is $.68 per share and translates to a yield of 1.67% at the stock’s current price.
- Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for BWA is $20.02 and translates to a Price/Book ratio of 2.02 at the stock’s current price. Their historical average Price/Book ratio is 2.56, suggesting suggests the stock is currently trading at a significant discount of a little over 26%. That is supported by the stock’s Price/Cash Flow ratio, which is currently about 37% below its average. Together, these providing a very compelling reason to take this stock seriously, with a long-term price of between $51 and $55 per share. That means the stock has some very good fundamental reasons to drive back near to the 52-week highs it saw a year ago.
Here’s a look at the stock’s latest technical chart.
- Current Price Action/Trends and Pivots: The red diagonal line measures the length of the stock’s longer-term upward trend, and also informs the Fibonacci trend retracement lines shown on the right side of the chart. The stock’s downward trend over the past year is easy to see; but so is the the stock’s rally from a low point around $33 per share to its current price. That rally has pushed the stock just a little below its 38.2% Fibonacci retracement line. In the near-term, that line should act as resistance, and could force the stock to reverse a bit; however if the stock can break above that line, to about $42 per share, it isn’t unreasonable to suggest the stock could see quite a bit of bullish momentum up to the $47 price region in a short period of time. That would also mark the official beginning of a new short-term upward trend and likely reversal of the long-term downward trend.
- Near-term Keys: If the stock manages to break above $42 per share, there is a very good signal to work with a short-term bullish trade using call options or the stock itself. If the stock sets a pivot high instead and starts to reverse lower, a bearish trader might be tempted to short the stock or to buy put options with an eye on the $33 trend low point as a target; but I think the stock’s latest bullish momentum will actually work against making that a high-probability trade. If the stock does drop off of resistance, however I think the value proposition is already very attractive, and so the argument for considering a long-term position in this stock becomes even stronger than it is now.