The prospect of a trade agreement between the U.S. and China, confirmed by both the White House and Chinese officials as it relates to “Phase One” of a long-term trade deal, along with generally settling geopolitical concerns that include Brexit worries, a slowing global economy, and central bank policy in both the U.S. and Europe that appears to be set on remaining accommodative for as long as absolutely possible all seem to be working in the market’s favor right now. An increasing number of analysts are predicting a continuation of the market’s long-term bullish trend for the foreseeable future; if correct, that means that the stage is set for an entirely new set of opportunities to take advantage of.
As it relates to trade, tensions in that area have weighed on a lot of stocks for more than a year, including the Automotive industry and stocks that are related to it. Over the last few months, however, the anticipation of a trade deal drove a number of stocks in the industry off of historical lows and into bullish trends that now appear poised to keep moving higher.
Borgwarner Inc. (BWA) is a good example of a stock that is rallying off of the extreme low end of its price range over the last two years; after hitting a low around $30 in late August, the stock has rallied nearly 47% higher and is now in the midst of a strong upward trend that is moving into an intermediate period of time. With the first stage of trade deal expected to be completed early next year, with negotiations than to continue throughout the rest of the year on remaining tariffs, this is a stock that may not be done moving higher. Do the fundamentals and value argument support a higher price? Let’s find out.
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 $9.2 billion.
Earnings and Sales Growth: Over the last twelve months, earnings decreased a little over -4%, while revenues were flat, but positive at 0.5%. In the last quarter, earnings declined by -4% while sales also dropped by about -2.3%. The company’s margin profile shows that Net Income as a percentage of Revenues are healthy, and stable; over the last twelve months this measurement was 7.42%, and 7.78% in the last quarter.
Free Cash Flow: BWA’s free cash flow is healthy and improving, at $894.4 million. This number marks an improvement from the beginning of the year, when Free Cash Flow was about $579 million. This also translates to a useful, strengthening Free Cash Flow Yield of 9.64%.
Debt to Equity: A has a debt/equity ratio of .436. This is a very manageable number, that suggests the company should have no trouble servicing their debt. Their balance sheet shows $916 million in cash and liquid assets against about $1.65 billion in long-term debt. Both of these numbers have also improved since the end of 2018.
Dividend: BWA’s annual divided is $.68 per share and translates to a yield of 1.51% 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 $22.17 and translates to a Price/Book ratio of 2.02 at the stock’s current price. Their historical average Price/Book ratio is 2.55, suggesting the stock is currently trading at a discount of about 26%. That is supported by the stock’s Price/Cash Flow ratio, which is currently a little more than 63% below its average. Together, these provide a very compelling reason to take this stock seriously, with a long-term price of between $56.50 and $73 per share. That means the stock has some very good fundamental reasons to drive back near to the 52-week highs it saw in 2018.
Technical Profile
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 downward trend, and also informs the Fibonacci trend retracement lines shown on the right side of the chart. The stock’s downward trend through 2018 is easy to see, as is its rally from that point in the months since the end of August. The stock recently pushed above the 50% retracement line at around $44.50, with the next likely resistance at around $48 where the 61.8% retracement can be seen. Current support is back at the 38.2% Fibonacci retracement line, at around $41 per share. A drop below that point could see the stock drop to its next support level, which is around $39.
Near-term Keys: The stock’s current momentum should definitely point a short-term trader to consider bullish opportunities; the stock could be setting up right now for a good opportunity to buy the stock or work with call options with an eye on $48 as a good short-term profit target. A bearish trade doesn’t offer good probabilities right now, given the strength of the current upward trend; however if the stock does drop below $41, you might consider shorting the stock or working with put options on a short-term bearish trade. The real story, at least in my opinion comes from the stock’s value proposition, which remains very attractive even with the stock’s big surge in price since the end of August.