BorgWarner, Inc. (BWA)

The auto industry has taken a beating as disposable income has decreased rapidly over the past year. A decreased liquidity brought on by higher home mortgage pricing is biting consumers and it is difficult to know when it will be over. Auto sales are down, and I have been one to stay away from this group, as I think they are neither a good short as any news could be good, or a buy as growth is limited going forward. BWA seems well positioned in this environment. They produce a variety of automotive parts, but the most important are their turbo chargers. The main reason these are important, are diesel engines, which are prolific in Europe. The reason these work especially well with respect to diesel is that diesel motors are generally good for pulling as they provide a lot of torque. Torque is registered in foot/pounds and it is the power generated initially with a motor. They do not generate a lot of horsepower which is more of responsiveness. Diesel motors seem to hesitate and turbochargers boost horsepower, to make them act more like gas motors. Turbo chargers are also nice as they boost horsepower in gas engines, but they can be programmed only to kick in when they are really needed. They act as a four barrel carburetor use to; as the accelerator needed to be pushed down a certain amount before more air was pushed into the motor.





The push of this product was evident with the current earnings. The first quarter profit rose 52%. Sales were up 17% and they have a large presence in Europe giving them additional revenue. This amount of sales was a record. Their earnings of $.75 a share was $.09 better than analyst estimates. Overseas sales were up 15%. Operating margin came in at 8.5%. They also reaffirmed guidance which should be easy for them to hit unless there is a substantial recovery of the dollar with respect to the Euro. All of this was done with sales down in the US by 4% while auto production decreased 8%. Turbo charger demand increased sales of the engine group by 23%. The drive train group was up 5% on dual clutch demand.





The chart also looks quite bullish going forward. On May 2nd there was a spread triple top breakout in a traditional three box reversal chart. This current trend has a price target of $75. If the stock reaches $52 on high volume it will set a 52 week high and then it is off to the races. Current analyst estimates have BWA at $2.85 a share for 2008 and this is at the low end of their guidance. Since they already beat by 9 cents it gives them a head start on hitting the high end of this number. I believe BWA will continue to see growth for the full year, but the first quarter may be their best as the dollar recovers somewhat as European banks cut rates to quell their housing crisis. My full year estimate is $3.05 as they will come in above guidance. This puts a full year stock estimate at a growth increase of 21%. If this growth takes place, it would seem a 2008 stock price of $64. Look for a three month increase of $55.