BorgWarner Inc (BWA, Financial) experienced a daily loss of -12.77%, marking a 3-month loss of -22.06%. Despite these losses, the company reported an Earnings Per Share (EPS) (EPS) of 4.05. Given these figures, the question arises: is BorgWarner (BWA) modestly undervalued? This article aims to provide a comprehensive valuation analysis to answer this question. So, let's delve into the financials and intrinsic value of BorgWarner.
Company Introduction
BorgWarner is a leading Tier I auto-parts supplier operating in three segments: air management, drivetrain and battery systems, and e-propulsion. The company's largest customers include Ford and Volkswagen, contributing 13% and 8% of 2022 revenue, respectively. Geographically, Europe, Asia, and North America equally dominate its revenue stream. As of November 02, 2023, BorgWarner (BWA, Financial) was trading at $32.37 per share, with a market cap of $7.60 billion. However, the GF Value, an estimation of the fair value, stands at $42.09, indicating a potential undervaluation.
Understanding the GF Value
The GF Value is a proprietary measure of a stock's intrinsic value, calculated considering historical trading multiples, a GuruFocus adjustment factor based on past performance and growth, and future business performance estimates. The GF Value Line represents the stock's fair trading value. If the stock price is significantly above the GF Value Line, it is overvalued, and its future return is likely to be poor. Conversely, if it is significantly below the GF Value Line, its future return will likely be higher.
Considering the current price of $32.37 per share and a market cap of $7.60 billion, BorgWarner appears to be modestly undervalued. As such, the long-term return of its stock is likely to be higher than its business growth.
Examining Financial Strength
Investing in companies with low financial strength can result in permanent capital loss. Therefore, it's crucial to review a company's financial strength before buying shares. BorgWarner has a cash-to-debt ratio of 0.19, ranking worse than 75.69% of 1234 companies in the Vehicles & Parts industry. Based on this, GuruFocus ranks BorgWarner's financial strength as 6 out of 10, suggesting a fair balance sheet.
Profitability and Growth
Investing in profitable companies carries less risk. BorgWarner has been profitable for 10 years over the past 10 years. During the past 12 months, the company had revenues of $16.90 billion and an Earnings Per Share (EPS) of $4.05. Its operating margin of 9.57% is better than 76.1% of 1268 companies in the Vehicles & Parts industry. Overall, GuruFocus ranks BorgWarner's profitability as strong.
Growth is a critical factor in a company's valuation. BorgWarner's 3-year average revenue growth rate is better than 65.29% of 1207 companies in the Vehicles & Parts industry. However, BorgWarner's 3-year average EBITDA growth rate is 1.7%, ranking worse than 60.44% of 1082 companies in the Vehicles & Parts industry.
ROIC vs WACC
Evaluating a company's profitability can also be done by comparing its return on invested capital (ROIC) to its weighted average cost of capital (WACC). ROIC measures how well a company generates cash flow relative to the capital it has invested in its business. WACC is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the ROIC exceeds the WACC, the company is likely creating value for its shareholders. During the past 12 months, BorgWarner's ROIC was 9.84 while its WACC came in at 8.57.
Conclusion
In conclusion, BorgWarner (BWA, Financial) appears to be modestly undervalued. The company's financial condition is fair, and its profitability is strong. However, its growth ranks worse than 60.44% of 1082 companies in the Vehicles & Parts industry. To learn more about BorgWarner stock, you can check out its 30-Year Financials here.
To find out high-quality companies that may deliver above-average returns, please check out GuruFocus High Quality Low Capex Screener.
This article, generated by GuruFocus, is designed to provide general insights and is not tailored financial advice. Our commentary is rooted in historical data and analyst projections, utilizing an impartial methodology, and is not intended to serve as specific investment guidance. It does not formulate a recommendation to purchase or divest any stock and does not consider individual investment objectives or financial circumstances. Our objective is to deliver long-term, fundamental data-driven analysis. Be aware that our analysis might not incorporate the most recent, price-sensitive company announcements or qualitative information. GuruFocus holds no position in the stocks mentioned herein.
