BorgWarner Inc.

Moat: 2.5/5

Understandability: 3/5

Balance Sheet Health: 4/5

BorgWarner is a global product leader in clean and efficient technology solutions for combustion, hybrid and electric vehicles.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview: BorgWarner is a global automotive supplier specializing in delivering innovative and sustainable mobility solutions. The company’s products are geared towards improving vehicle performance, propulsion efficiency, stability, and air quality. They manufacture and sell these products worldwide, primarily to original equipment manufacturers (OEMs) of light vehicles, commercial vehicles (medium-duty trucks, heavy-duty trucks, and buses) and off-highway vehicles (agricultural and construction machinery). Their products are also sold to OEMs of commercial vehicles and the aftermarket. This diversified approach positions BorgWarner as an original equipment supplier to nearly every major automotive OEM across Europe, the Americas and Asia.

  • Revenue Distribution: BorgWarner operates through four reporting segments: Air Management, e-Propulsion & Drivetrain, Fuel Systems, and Aftermarket.
    • The Air Management segment focuses on products like turbochargers, eBoosters, eTurbos, and emission systems aimed at improving fuel economy and emissions for combustion and hybrid vehicles.
    • The e-Propulsion & Drivetrain segment is responsible for products in electrical systems for hybrid and electric vehicles such as battery systems, inverters and motor controllers, and control modules.
    • The Fuel Systems segment produces products that enable precise fuel delivery, including pumps, injectors, fuel rails, and other fuel and emissions control components for gasoline and diesel fueled vehicles.
    • Finally, the Aftermarket segment provides a diverse range of products and services to aftermarket customers and original equipment service customers.
  • Industry Trends: The automotive industry is undergoing rapid change, shifting toward electrification and autonomous driving technologies. There is a growing demand for fuel efficiency, reduced emissions, and increased vehicle performance. BorgWarner’s e-propulsion solutions are strategically positioned to capitalize on these trends. As a leader in clean and efficient technology solutions, BorgWarner is benefiting from the expansion of electric vehicles and other related tech.
  • Competitive Landscape: BorgWarner faces intense competition from other global suppliers. However, their focus on technology solutions for cleaner and efficient mobility provides differentiation. While some competitors have a broader product portfolio, and some smaller players have unique technologies, BorgWarner’s scale, global reach, and deep customer integration provides them with competitive edge.
  • What Makes BorgWarner Different?: BorgWarner is at the forefront of electrification, with over 40% of its 2023 revenues generated from hybrid and electric vehicle components and systems. This is a significant pivot from traditional combustion engines, giving them a growth vector that may not be present for competitors. BorgWarner’s scale also allows them to invest significant amount in research and development.

Financial Highlights (based on 2023 10K):

  • Revenue: BorgWarner reported total sales of $16.14 Billion in 2023. The segments that produced the most sales in the Air Management Segment ($6.8B), e-Propulsion and Drivetrain Segment ($6.7B), Fuel Systems Segment ($1.8B) and Aftermarket segment ($2.1B).
  • Net Income: Net earnings attributable to BorgWarner for the year ended December 31, 2023 was $929 million (or $3.92 per diluted share.) The adjusted profit from continuing operations was $2.59 per diluted share.
  • Return on Invested Capital (ROIC): The company’s ROIC has been steadily improving. It went from 10.8% in 2021 to 11.8% in 2022 and 12.7% in 2023. The company has a goal to expand ROIC to above 15%.
  • Gross Profit Margin: Gross profit margin for 2023 was 17.9%, while Segment adjusted operating margins varied widely.
  • Financial Leverage: The Debt to equity ratio at December 31st, 2023 was 73% as per their balance sheet.

Recent Performance and Management Commentary (From Q1,2024 Earnings Call):

  • 2024 Outlook: The company forecasts organic sales growth in the range of 1 to 4% for 2024. The Company is expected a modest decrease in net business-related sales growth over the year, mainly because of decreased light vehicle production. But they do expect the benefit of growth to be partially offset by the negative earnings impact of the acquisition of PHINIA. The new Charging Forward Strategy will drive revenue and value in the next few years. The company is targeting for revenues from pure electric vehicle products to be over 25% of its total revenue by 2027 and reach 45% by 2030.
  • Inflation: The company notes ongoing supply constraints and increasing inflation, especially in raw material costs, labor costs and energy prices, which are affecting their margins negatively.
  • PHINIA spin off: BWA separated its Fuel Systems and Aftermarket segments as a new publicly listed company called PHINIA Inc. in July 2023. BWA hopes to benefit from this spin-off because these two segments of the company are less profitable compared to others. The management thinks it is better to focus efforts on higher profitability segments.
  • Q1 2024 Results: BWA’s Q1 results was in line with expectations. Revenue was up by 7% to $3.85 billion, while adjusted EPS was $0.97.
  • Acquisition: The company is continuing with strategic acquisitions of new business which will be focused around high-voltage inverters, converters, and controllers.
  • Liquidity: The company maintained a strong liquidity position with ample cash and borrowing capacity.

Moat Rating: 2.5 / 5

  • Intangible assets (Brands/Patents): BorgWarner has a strong reputation for quality and innovation but they don’t have a large number of patents or extremely powerful brands and rely on their technological advantages.
  • Customer Switching Costs: There are some modest switching costs due to long development time, established relationships, and custom-designed products, but these are not insurmountable for competitors.
  • Network Economics: BorgWarner does not primarily benefit from strong network effects.
  • Cost Advantages: A primary source of moat is from their production and geographical scale, including relationships with low-cost suppliers, which allows the company to reduce cost. However, these are replicable by competitors. Therefore, the advantage is not a wide-moat advantage. They also lack unique resources.

Overall, BorgWarner has a narrow economic moat because they are more or less a commoditized producer of products for automotive sector, which makes its earnings and overall success dependent on industry trends. Their current technological push into EV related components and systems can potentially give them a wide-moat, but the sector is still relatively new.

Risks that Can Harm the Moat:

  • Technological Disruption: Rapid technological advancements in electric vehicles and battery systems could make BorgWarner’s technology obsolete. Competition with other high-tech EV manufacturers and R&D companies can lead to a loss in their relative market position.
  • Competition: The automotive industry is highly competitive. This could lead to price wars, hurting their margins and revenues.
  • Raw Material Price Inflation: High inflation, especially in raw materials, will affect operating margins negatively.
  • Customer Concentration: A significant portion of sales goes to top automotive customers. Loss of business from one or several of these major customers can seriously impact the financials.
  • Economic Downturn: Any downturn in global automotive production can lead to lower earnings and poor returns.
  • Restructuring costs: The restructuring expenses related to its restructuring programs may be higher than expected, as restructuring plans are difficult to estimate and can often take more time or involve additional costs.

  • Supply Chain Disruption: Disruptions in their supply chain, such as those caused by COVID or other such events, can harm their ability to maintain production and deliver products in a timely manner.

  • Overall Business Resilience: The business is resilient because the company’s products are typically integrated in the OEMs design, making those products harder to displace. BWA products also provide a necessary function for the automotive sector. And BWA’s position as a top manufacturer should see them benefit from increasing need for electric vehicle components in the long-term.

Understandability: 3 / 5 While the company’s operations are somewhat easy to grasp, understanding the complexities of their financial statements can be tricky. The technology aspect of the business can be complex for investors who lack a technical background.

Balance Sheet Health: 4 / 5 BorgWarner’s balance sheet is in a healthy condition with a debt to equity ratio that allows the company to take advantage of opportunities and expand in the market. The credit rating is stable. The amount of cash is also sufficient.