Drivetrain and engine technology company BorgWarner's (NYSE: BWA) strong set of fourth-quarter results provided further evidence that it can grow more than its end markets. Let's take a closer look at its performance and at what CEO James Verrier has planned for 2018.
BorgWarner's fourth-quarter earnings results: The raw numbers
Starting with the headline numbers from the quarter:
- The company posted organic sales growth of 10.2% compared to previous guidance of 5%-6.5%.
- Non-GAAP diluted EPS came in at $1.07 compared to previous guidance of $0.99-$1.01.
The fourth quarter capped off a strong year for the company as it managed to overcome weak growth in its end markets. Verrier said on the conference call that BorgWarner's light-vehicle end market exposure was only up 0.5% in 2017 compared to the company's full-year organic growth of 10.3%.
The full-year highlights:
- BorgWarner had net sales of $9.8 billion, representing a reported increase of 8% and organic growth of 10.3%.
- Non-GAAP diluted EPS grew 19% to $3.89.
So, a strong full year and Verrier's outlook for 2018 implies more growth to come.
There were few surprises in the guidance -- aside from adjustments made for currency and tax reform -- because the 2018 outlook had already been announced barely a few weeks ago at the Deutsche Bank Global Auto Industry Conference in Detroit. Nevertheless, it's worth reviewing it because it highlights the company's earnings momentum.
- Full-year organic sales growth is expected in the 5%-7% range.
- The company foresees "modest" improvement in operating margin from 12.4% in 2017 to 12.6%-12.7%.
- Full-year EPS will grow 9.3%-11.8% to $4.25-$4.35.
- Free cash flow will be $525 million-$575 million.
Why BorgWarner can outperform
These figures are impressive enough, but consider that Verrier expects global light vehicle industry production to be "stable to slightly improved" in 2018 while BorgWarner's specific industry exposure is only expected to increase 1%. Moreover, the company has to overcome an industry headwind due to the shift from diesel to gasoline-powered vehicles (BorgWarner is a leading manufacturer of turbochargers for diesel-powered cars).
So why is BorgWarner growing more than its end markets?
In a nutshell, BorgWarner can continue to improve content per vehicle and win new industry awards including "significant" ones on "hybrids and EVs" in 2018, according to Verrier on the earnings call. He also said:
In fact, the growth of hybrid and electric vehicles "creates great content opportunity for BorgWarner," Verrier stated.
Three things to watch
Verrier also outlined three key areas to focus on in 2018:
- The maturing light-vehicle cycle in North America.
- An increase in the diesel to gasoline shift, particularly in Europe.
- China light-vehicle production growth, and the potential impact on demand from possible tax incentive changes.
Of course, none of these factors is anything new: BorgWarner already faced these risks in 2017 and none of them hurt the company. That's not to say that auto sales and production couldn't deteriorate in 2018, but given the same conditions as last year, BorgWarner is likey to do well again.
All told, BorgWarner isn't immune from end-market deterioration, but based on management's guidance, the company is doing fine even with mediocre growth there. If it delivers as planned, BorgWarner looks set for another good year.
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