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BorgWarner’s Guidance Upbeat Despite Currency Headwinds


BorgWarner Inc. BWA provided its first quarter and full-year 2017 earnings guidance. The company also revealed its projections for 3-year net new business.

Outlook for Q1

Net sales growth for first-quarter 2017 is projected in the range of 2.5–6.5%. The Remy light vehicle aftermarket sale is expected to have a negative impact of $70 million.

Also, the foreign currencies are expected to have a negative impact of $60 million or 2.7%. However, excluding the impact of weaker foreign currencies and the Remy light vehicle aftermarket sale, the year-over-year increase in net sales for first-quarter 2017 is estimated to range between 2.5% and 6.5%.

Net earnings for the first quarter of 2017 are expected in a band of 81–85 cents per share. Higher corporate expenses, raw material timing and other costs are expected to have a negative impact of 4 cents per share.

Outlook for 2017

For 2017, the company expects net sales of around $8.81–$9.04 billion, which translates into a growth rate in the range of 3.5–6% from the 2016 net sales guidance of around $9.05 billion. The company expects negative impact of foreign currencies due to the depreciation of the Euro, Yuan and Pound of $320 million. Also a negative impact of around $235 million due to the sale of the Remy light vehicle aftermarket business is expected by the company. Excluding the impact of weaker foreign currencies and the Remy business sale, net sales are expected to grow around 3.5–6%.

Further, BorgWarner expects net earnings in the range of $3.35–$3.45 per share in 2017. Foreign currencies are likely to have a negative impact of 13 cents on earnings per share. The earnings guidance (on a constant currency basis) implies a growth rate of 7–10% from 2016.

Operating margin for 2017 is expected to be 12.7–12.8%. BorgWarner expects a positive impact of 30 basis points due to the Remy business sale.

Effective tax rate of BorgWarner should be about 32% this year. Further, the company expects free cash flow of $450–$500 million in 2017. It also plans to spend $100 million on share repurchases.

Projections for 3-Year Net New Business

The company expects to generate net new business of $410–$590 million in 2017, $460–$670 million in 2018, and $500–$700 million in 2019. As a result, organic compound annual growth rate is estimated to be 5–7% from 2016 through 2019. About 62% of the new net business in the 2016–2019 period is expected to stem from engine-related products, while the remaining 38% should be generated from drivetrain-related products.

Asia, the Americas and Europe are expected to generate 40%, 39% and 21%, respectively, of the new business over three years. China (32%) and North America (25%) are anticipated to contribute to a major portion of growth.

Price Performance

BorgWarner has underperformed the Zacks categorized Auto/Truck Original Equipment industry over the last one-year period. The company’s shares have gained 7.3% year to date, compared with a 21.6% gain recorded by the industry.

Zacks Rank & Key Picks

BorgWarner currently carries a Zacks Rank #4 (Sell).

Better-ranked companies in the auto space include Penske Automotive Group, Inc. PAG, Fox Factory Holding Corp FOXF and GKN plc GKNLY.

Fox Factory sports a Zacks Rank #1 (Strong Buy). The company has an expected earnings growth rate of around 16.6% for the long term. You can see the complete list of today’s Zacks #1 Rank stocks here.

Penske Automotive carries a Zacks Rank #2 (Buy). It has an expected long-term earnings per share growth rate of 8.2%.

Meanwhile, GKN holds a Zacks Rank #2. It has a long-term growth rate of 6.3%.

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