In the summer of 2021, I concluded that BorgWarner (NYSE:BWA) was shifting into its next gear. This came as the company was rapidly focusing on electrification of its product offerings, as EV ambitions were large, but actual realizations were still in their early innings.
As the intentions were obviously good and the performance in 2020 was quite resilient, I felt that quite some good news has been priced in already.
BorgWarner has grown to its current existence following a big $3.3 billion deal for Delphi in order to create a $14 billion giant. The deal closed in October, despite the uncertainty of the pandemic, as the deal added electrical expertise, although Delphi contributed relatively few earnings, yet this really was a strategic deal.
In February 2021, BorgWarner posted 2020 sales at $10.2 billion which was flat compared to the year before, although Delphi started to contribute in the fourth quarter as the deal closed in this period. Adjusted earnings fell from $4.13 per share in 2019 to $2.76 per share, quite solid given the underlying uncertainty those days.
The company anticipated a 12-17% increase in organic sales in 2021, which combined with the Delphi contribution should result in a $15 billion revenue number that year, with earnings seen around $4 per share. Besides the Delphi deal, BorgWarner further reached a deal to acquire AKASOL AG in a EUR 727 million deal in 2021 to further bolster its EV ambitions.
This designer and manufacturer of battery packs was set to add $150 million in annual revenues, a drop in the bucket being equal to 1% of total revenues, but an important signal nonetheless. Following these deals and a solid outlook for 2021, shares have risen to levels in the $50s, marking solid gains. Nevertheless, I noted that it was still early days of electrification, with just 3% of revenues derived from such products.
A resulting 15 times earnings multiple and 2 times leverage ratio looked reasonable, yet the automotive supplier industry is notoriously cyclical and multiples are never really high, as the EV transition was still early, which left me to lean cautious.
Caution Saves The Day
Since the summer of last year, shares have actually lost quite some ground, now trading at $39 as a retreat of about a third of the value comes amid concerns about growth, as well as supply chain issues, inflation pressures and chip shortages.
Forwarding to February of this year, BorgWarner posted its 2021 results, coming in a touch light compared to the original guidance, driven by the factors mentioned above. The company reported a 46% increase in full year sales to $14.8 billion. Adjusted earnings came in at $4.15 per share, yet GAAP earnings only totaled $2.24 per share with the large gap being the result of restructuring expenses, losses on equity investments, merger costs and debt extinguishment costs, among others. The electric vehicle business is still responsible for a fraction of total revenues, yet is set to more than double to $800 million in 2022.
The 2022 guidance revealed modest anticipated sales growth with sales seen between $15.9 billion and $16.5 billion, with adjusted earnings set to come in between $4.15 and $4.60 per share, implying that earnings are flat at best, but could rise quite substantially.
In February, BorgWarner only closed the deal with AKASOL AG which was announced about a year earlier, bolstering net debt quite a bit to nearly $3 billion, as the deal is key in the EV transition movement of the business. In the same month, the company announced the purchase of Santroll’s light vehicle eMotor business in China in a deal valued at 1.4 billion yuan.
By May, BorgWarner posted a 3% decline in first quarter sales to $3.9 billion with adjusted earnings down from $1.21 per share to $1.05 per share, as the company cut the full year sales guidance to $15.5-$16.0 billion, to an important extent the result of a strong dollar. Earnings were now seen just between $3.90 and $4.25 per share.
In August, BorgWarner posted flattish second quarter sales at $3.8 billion as adjusted earnings of $1.05 per share were down three cents compared to the year before. The full year earnings guidance was left unchanged, as adjusted earnings are now seen between $4.00-$4.40 per share, with net debt posted at $2.8 billion now. The company increased the 2021 electrification guidance to $850 million, still implying a share of just over 5% of total revenues.
The company does keep increasing its focus on electrification as the company announced the next deal alongside the second quarter earnings report. The company announced the purchase of Rhombus Energy Solutions, a certified charging business in a $185 million deal, comprised of a $130 million upfront payment as well as potential earn-outs valued at $55 million in the coming years. The deal is set to add just $10 million in sales this year but could boost 2025 sales by $200 million, which looks very encouraging if that becomes reality.
Fast forward a year, electrification efforts are still in the early innings, but BorgWarner appears to be on the hunch for more deals to accelerate the transition. In the meantime, the core business is struggling/stagnating a bit, yet a 14-15 times earnings multiple this time last summer has fallen to about 10 times here, as leverage is still very reasonable and progress on electrification continues.
Hence, it is time to become a bit more upbeat on BorgWarner, yet the inherent uncertainty and volatility of automotive suppliers prevent me from getting too upbeat, as few of these businesses have been able to deliver on consistent shareholder value creation over sustained periods of time .