The shares of vehicle technology company BorgWarner (NYSE: BWA) declined 15.1% in May according to data provided by S&P Global Market Intelligence.
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The move comes partly as a consequence of negative sentiment toward companies with automotive exposure in terms of end demand and also as part of concerns over the potential impact of tariffs on its costs. Moreover, the decline appeared to start after the company's mixed first-quarter earnings report.
The first-quarter earnings are a case in point. For example, BorgWarner clearly outperformed its end market exposure, but that's a fat lot of good if it means revenue growth still ends up negative. In fact, BorgWarner's organic revenue growth was a negative 3.3% in the quarter compared to its industry exposure, which saw a production decline of 5.2%. Herein lies the problem. BorgWarner's management is running very hard just to try and stand still, and there isn't much the company can do about declining global automotive sales and production.
Moreover, the first-quarter earnings were also hit by tariff impacts, supplier bankruptcies, and a decision to step up restructuring plans.
Unfortunately, the latest round of tariff actions will inevitably raise fears regarding BorgWarner's near-term outlook, and sentiment won't have been helped by a slew of companies with automotive capital spending exposure; from Rockwell Automation to 3M and Cognex, it's been a story of automotive companies holding back spending in 2019.
However, while there isn't a lot BorgWarner can do about end-market conditions, it can do something to adjust to the new realities. CEO Frederic Lissalde's plan is to reduce annual structural costs by $40 million to $50 million through restructuring actions that will cost the company $80 million to $100 million "through the end of 2020."
In turn, the cost savings are earmarked to be plowed back into increased research and development spending in order to support growth in hybrid and electric vehicles, and many automotive companies are seen as releasing new hybrid/EV vehicles in 2020 and beyond.
Lissalde's boldness in adjusting to matters -- even at the near-term cost of increased restructuring expenses -- looks to be a good move, but ultimately investors will want the company to meet its earnings expectations for 2019 and beyond. For that, global light vehicle sales, and ultimately production, are going to have to stabilize or at least fall into line with expectations.
For now, all eyes will be on the ongoing trade dispute and the impact of tariffs on end demand and how these factors will play out in BorgWarner's margin and progress on contract awards.
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