BorgWarner Inc Valuation – February 2016 Update $BWA

Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 10 Companies Benjamin Graham Would Invest In Today – February 2016.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a stock analysis showing a specific look at how BorgWarner Inc (BWA) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): BorgWarner Inc. is a supplier of engineered automotive systems and components for powertrain applications. The Company operates through two segments: Engine and Drivetrain. The Engine segment’ develops and manufactures products in gasoline and diesel engines and alternative powertrains. The Drivetrain segment develops and manufactures products for automatic transmissions and all-wheel drive (AWD) vehicles. The Company manufactures and sells the product across the world, to equipment manufacturers (OEMs) of light vehicles. The Company sells the products to other OEMs of commercial vehicles and off-highway vehicles (agricultural and construction machinery and marine applications). It also manufactures and sells its products to Tier One vehicle systems suppliers and into the aftermarket for light, commercial and off-highway vehicles. The Company operates manufacturing facilities serving customers in the Americas, Europe and Asia and is an equipment supplier to automotive OEM.


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Downloadable PDF version of this valuation:

ModernGraham Valuation of BWA – February 2016

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $6,679,848,424 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 2.14 Pass
3. Earnings Stability Positive EPS for 10 years prior Fail
4. Dividend Record Dividend Payments for 10 years prior Fail
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 322.17% Pass
6. Moderate PEmg Ratio PEmg < 20 10.65 Pass
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 1.73 Pass
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 2.14 Pass
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 0.98 Pass
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Pass
5. Earnings Growth EPSmg greater than 5 years ago Pass

Stage 2: Determination of Intrinsic Value

BWA value Chart February 2016

EPSmg $2.67
MG Growth Estimate 15.00%
MG Value $102.78
Opinion Undervalued
MG Value based on 3% Growth $38.71
MG Value based on 0% Growth $22.69
Market Implied Growth Rate 1.08%
Current Price $28.44
% of Intrinsic Value 27.67%

BorgWarner Inc qualifies for the Enterprising Investor but not the more conservative Defensive Investor.  The Defensive Investor is concerned with the insufficient earnings stability over the last ten years, and the inconsistent dividend history.  The Enterprising Investor has no initial concerns. As a result, all Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company.

As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $1.24 in 2011 to an estimated $2.67 for 2015.  This level of demonstrated earnings growth outpaces the market’s implied estimate of 1.08% annual earnings growth over the next 7-10 years.  As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value above the price.

Stage 3: Information for Further Research

BWA Charts February 2016

Net Current Asset Value (NCAV) -$2.96
Graham Number $32.43
PEmg 10.65
Current Ratio 2.14
PB Ratio 1.73
Dividend Yield 1.83%
Number of Consecutive Years of Dividend Growth 3



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Most Recent Balance Sheet Figures

Balance Sheet Information Sep2015
Total Current Assets $3,301,000,000
Total Current Liabilities $1,539,800,000
Long-Term Debt $1,734,500,000
Total Assets $7,687,100,000
Intangible Assets $1,183,700,000
Total Liabilities $3,970,100,000
Shares Outstanding (Diluted Average) 225,991,000

Earnings Per Share History

Next Fiscal Year Estimate $2.82
Dec2014 $2.86
Dec2013 $2.70
Dec2012 $2.09
Dec2011 $2.23
Dec2010 $1.54
Dec2009 $0.12
Dec2008 -$0.16
Dec2007 $1.23
Dec2006 $0.92
Dec2005 $1.04
Dec2004 $0.97
Dec2003 $0.80
Dec2002 -$0.56
Dec2001 $0.31
Dec2000 $0.44
Dec1999 $0.63
Dec1998 $0.50
Dec1997 $0.54
Dec1996 $0.22

Earnings Per Share – ModernGraham History

Next Fiscal Year Estimate $2.67
Dec2014 $2.49
Dec2013 $2.11
Dec2012 $1.60
Dec2011 $1.24
Dec2010 $0.74
Dec2009 $0.43
Dec2008 $0.66
Dec2007 $1.04
Dec2006 $0.85
Dec2005 $0.71
Dec2004 $0.49
Dec2003 $0.28
Dec2002 $0.10
Dec2001 $0.45
Dec2000 $0.50
Dec1999 $0.48

Recommended Reading:

Other ModernGraham posts about the company

12 Best Stocks For Value Investors This Week – 11/7/15
The Best Companies of the Auto Industry – October 2015
5 Undervalued Companies for Enterprising Investors Near 52 Week Lows – August 2015
The 16 Best Stocks For Value Investors This Week – 8/1/15
BorgWarner Inc. Analysis – July 2015 Update $BWA

Other ModernGraham posts about related companies

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The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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