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BorgWarner Continues to Outperform

The global auto market is slowing, but you wouldn't know it from the latest results from vehicle technology company BorgWarner, Inc (NYSE: BWA). The company has consistently demonstrated an ability to outgrow its end markets. As a consequence, its strong set of third-quarter results encouraged management to raise full-year guidance and left analysts wondering if BorgWarner's earnings growth could accelerate. Let's take a look at what happened in the third quarter.

BorgWarner continues to grow revenue more than the car industry grows production. Image source: Getty Images.

BorgWarner third-quarter earnings: The raw numbers

Starting with the headline numbers from the quarter:

  • Net sales of $2.42 billion increased 10.8% on an organic basis compared to the guidance range of 3%-6%.
  • Net EPS of $0.88 came in ahead of the guidance range of $0.84-$0.87.

Earnings received a tiny boost of $1 million from better-than-expected currency movements in the quarter. For reference, BorgWarner's management had expected sales to be lowered by $36 million due to this factor, but foreign currency movements actually increased sales by around $38 million in the quarter.

No matter which way you cut it, net sales came in much stronger than expected on an organic basis -- a measure that excludes the impact of foreign currency movements.

Guidance

The strong performance caused management to hike BorgWarner's full-year guidance:

  • Full-year sales are expected in the $9.67 billion-$9.7 billion range, representing organic net sales growth of 9%-9.5% compared to previous guidance of 6.5%-7.5%.
  • Foreign currency is expected to increase sales by $37 million compared to previous guidance for a $100 million reduction.
  • Net EPS is expected to be in the range of $3.81-$3.83 compared to previous guidance for $3.65-$3.70.

How BorgWarner outperformed its end markets

The second half of the year is supposed to be the period when the slowdown in auto builds starts to hit industrial companies with transportation exposure. For example, Illinois Tool Works  had prepared investors for slowing growth in its automotive segment in the third quarter. Ultimately, Illinois Tool Works' automotive segment's organic revenue growth came in at 1% compared to 4% in the second quarter. Interestingly, both companies' automotive revenue growth continues to exceed that of auto builds in each major region:

Segment

North America Q3 Revenue Growth

China Q3 Revenue Growth

Europe Q3 Revenue Growth

Illinois Tool Works Automotive OEM segment

(7%)

10%

8%

BorgWarner

Double-digit

34%

7%

Light-vehicle auto builds

(10%)

1%

4.5%

Data source: BorgWarner's and Illinois Tool Works' presentations. Illinois Tool Works' data is organic revenue growth; BorgWarner's is revenue growth.

In a nutshell, BorgWarner was able to outperform its end markets thanks to new contract wins -- including a turbocharger for a Honda engine and an electric motor for a Scania bus -- and its technological solutions, which play to the need for automakers to meet emission standards and develop advanced propulsion solutions.

Segment performance

It's a good idea to look at BorgWarner's performance by segment. The good news is that both segments grew sales more than they did in the second quarter

Segment

Net Sales

Organic Growth

Adjusted EBIT

Growth in Constant Currency

Engine

$1.5 billion

8.7%

$239 million

7.1%

Drivetrain

$922 million

14.4%

$111 million

24.6%

Data source: BorgWarner presentations.

Discussing engine segment growth in the quarter, CEO James Verrier said "strong growth came from turbo and timing systems and our thermal products. And again, despite the change to the diesel-gas mix, we're seeing solid top-line growth in the engine segment."

Turning to the powertrain segment, he cited "strong all-wheel drive, DCT and transmission components sales in North America, China and Europe." (DCT stands for dual clutch transmission, a gearbox seen as more efficient than automatic or manual transmission systems.) 

Looking ahead

Management's fourth-quarter guidance calls for 5%-6.5% organic growth in revenue, which implies a continuation of BorgWarner's outperformance compared to industry growth. Given that BorgWarner's organic net sales increased 7.8% and 10.8% in the second and third quarters, management's guidance may well turn out to be too conservative. Time will tell.

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Lee Samaha has no position in any of the stocks mentioned. The Motley Fool recommends BorgWarner. The Motley Fool has a disclosure policy.