TSLA - Smartest Way To Play An Upturn In EV/ICE Auto Production: BorgWarner

Summary

• You don't have to pick the winner between internal combustion engine or electric vehicle sales growth in future years if you own a main parts supplier to both.
• BorgWarner is perhaps the best positioned to benefit from any upturn in auto manufacturing demand industrywide.
• A conservative balance sheet and low valuation (as opposed to rich for the major carmakers) are drawing my attention.
• A rapidly improving momentum trading chart could signal 2023 will be a great year for shareholders, especially if a deep recession is avoided.

If you are excited about EV growth in the auto sector, or just wanting to participate in the global reopening from COVID shutdowns and disruptions in the ICE (gas-powered) car market, one name stands out as a top and highly profitable supplier to the industry - BorgWarner, Inc. ( BWA ).

I talked about the company in another bullish article during February 2021 here. The share quote basically stands at the same level roughly two years later, mimicking the flat total return performance in the S&P 500 over the same period. Sputtering reopenings in car markets and supply-chain issues have limited auto production and negatively impacted BorgWarner's parts sales totals. Yet, strong income generation and increasing overall revenue numbers provide an excellent foundation when industry units manufactured finally do increase.

Another catalyst for ownership is the company understands electric vehicles are the future and has decided to spin off the fuel systems and aftermarket parts divisions into a separate company by the end of 2023. What remains will be the electric propulsion and drivetrain division, plus air management segment. The company has a 2025 goal of $4.5 billion in EV related sales, from less than $350 million in 2021. These numbers compare to companywide sales around $15 billion in calendar 2022.

Excellent Valuation for New Buyers

The company held $6.5 billion in cash and current assets like accounts receivable at the end of September vs. $9 billion in total liabilities. This conservative setup for a capital-intensive business looks even better compared to trailing annual cash flow generation of $1.2 billion and $800 million in free cash flow. Robust cash flows give management the financial flexibility to expand the business, reduce debt, pay a dividend or buy back shares. Theoretically, BorgWarner could be "net" liability free in 2-3 years.

For me, the most intelligent argument to own the company is its cheap valuation proposition. In fact, today's basic ratio analysis indicates an overall valuation approaching the depths of BWA's March 2020 pandemic selloff, the 10-year low area.

Below is a decade graph of price to trailing earnings, sales, cash flow and tangible book value. BorgWarner is now selling for approximately a 25% discount to 10-year averages.

The news gets even better when adding the stellar balance sheet in January 2023. Using enterprise value (adding total debt minus cash holdings), BWA is priced at a 35% discount to decade averages. On EV to EBITDA or Revenue calculations, you would think the operating business was in long-term decline.

When contrasting BWA stats on enterprise valuation, it's not hard to see shares are also a bargain vs. major automakers and parts suppliers. Below is graph looking at forward projected EBITDA by Wall Street analysts. BorgWarner's 5x EV to estimated EBITDA ratio is incredibly low. The sort group includes Tesla ( TSLA ), Ford ( F ), General Motors ( GM ), Toyota ( TM ), Honda ( HMC ), Lear ( LEA ), Gentex ( GNTX ), Autoliv ( ALV ), Aptiv PLC ( APTV ), and Magna International ( MGA ).

Again, on total enterprise value vs. trailing earnings generation, BWA is essentially the cheapest of the group at 13x.

Despite the ultra-low valuation, which seems to discount a business in turmoil and headed toward a decline in operations, the opposite is taking place. Earnings per share are expected to DOUBLE over the next 5 years, at a rough +15% growth rate! This projection means BorgWarner is selling at a long-term PEG Ratio (price to earnings divided by earnings growth rate) close to 0.80 today. Remember, PEG numbers under 1.0 are considered strong buy territory. (Even after the 2022 bear market decline of 20% to 30% in the typical U.S. stock, I am having difficulties finding PEGs under 1.0.)

Improving Trading Momentum

The low valuation and positive long-term growth story is starting to pick up some interest by investors in trading since October. The latest strength has pulled its total return performance into the leading position out of automaker and parts peers in this article. On both trailing 6-month and 12-month results, BorgWarner is morphing into a standout selection.

Reviewing a 1-year chart of daily price and volume changes, BWA is also starting to outperform the general S&P 500 index. Plus, price is now firmly above its upsloping 50-day and 200-day moving averages.

Other momentum indicators are trending higher in early January. The 14-day Money Flow Index reached an oversold condition a few weeks ago that has reversed into buying (circled in blue). Plus, the Negative Volume Index has been quite strong since March (marked with a red arrow), meaning regular "buying on weakness" has been part of the investment equation for some time. The bullish NVI trend may also be hinting at a lack of overhead supply.

Final Thoughts

BorgWarner offers the opportunity to earn a sizable total return profit (1.6% dividend yield currently) on your money over the long term, regardless of auto demand tastes my consumers. You don't have to make a brilliant call on which automaker will be the EV sales growth winner in the near future. You don't have to make the bottom call of an approaching recession, or directly know when auto sales will move dramatically higher. The important point to note is the company provides many in the auto industry with its award-winning parts necessary for cars to function at peak performance.

Seeking Alpha's Quant Rank of BorgWarner is a Top 5% score currently. Looking at trading momentum and earnings revisions, this name is worthy of a deeper dive by readers and serious investors.

A conservative balance sheet, superb valuation, and above industry-average growth outlook are all available in a single investment, prepared to benefit nicely as the economy reopens worldwide and EV demand skyrockets.

What are the investment risks? I believe BorgWarner's biggest downside would come from (1) a deep recession scenario, hurting car sales for several years, and (2) the continuation of a wicked bear market selloff on Wall Street generally in 2023. Both are risks that may play out. So, I would not ignore them out of hand. However, if BWA suffers this year, the rest of the auto industry will likely find even worse issues for investors. Excessive debt levels, intense competition for sales, and even operating losses are not the same worries from this corporation.

Thanks for reading. Please consider this article a first step in your due diligence process. Consulting with a registered and experienced investment advisor is recommended before making any trade.

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