What happened
Shares of automotive technology company BorgWarner (BWA -0.22%) rose 10.9% in August, according to data provided by S&P Global Market Intelligence. The rise comes as a consequence of a combination of a slightly better outlook for automotive production in 2020 and a demonstration of the company's ability to outgrow its end markets.
The change in expectations for BorgWarner's end markets and sales can be seen in the updated management guidance given in the second-quarter earnings call on Aug. 5. By way of reference, by "end markets," BorgWarner means the change in light-vehicle production weighted for its geographic exposure, so it's not a direct marker of global light-vehicle production. On the other hand, it provides investors with a useful way to benchmark the company's ability to grow more than its end markets.
|
Full-Year 2020 Guidance |
Current |
Guidance in May |
|---|---|---|
|
YOY end market growth (decline) |
(25% to 22%) |
(31% to 25%) |
|
YOY BorgWarner organic sales growth (decline) |
(20% to 16%) |
(27% to 20%) |
|
Free cash flow |
$300 million to $400 million |
$100 million to $300 million |
Data source: BorgWarner. YOY = year over year.
The company's ongoing ability to beat its end markets was apparent in the second quarter with BorgWarner reporting a 43% decline in its organic sales compared with a 50% decline in its end markets.
Make no mistake, it's still set to be a horrific year for automotive suppliers, but as you can see in the chart below, sales and production appear to have bottomed out in the second quarter and look set to bounce back strongly in 2021. As a consequence, Wall Street analysts have BorgWarner's sales growing nearly 18% in 2021.
Data by YCharts.
So what
An improving end-market backdrop and ongoing outperformance are obviously good news and will be well received by investors as BorgWarner prepares to complete its acquisition of fellow automotive supplier Delphi Technologies (DLPH).
BorgWarner needs automotive production to come back. Image source: Getty Images
It's a deal that management believes will result in a company well placed to benefit from the growth in electric and hybrid vehicle demand in the coming years. For example, management believes the acquisition will result in a company with 8% exposure to electric vehicles and 29% to hybrids, compared with a marketplace made up of 8% electric vehicles and 25% hybrid.
Now what
Automotive investors will be focused on the light-vehicle sales and production outlook and hoping that the bounce will extend into 2021. There's a case for arguing that the pandemic may well boost willingness to own a car rather than use public transport. On the other hand, automotive purchases are largely seen as consumer discretionary items, which suffer if the economy and employment turn sour.
In addition, BorgWarner investors will be hoping the Delphi acquisition goes ahead without any hitches and the company continues to outperform its end markets.
