Thursday, September 17, 2009

BorgWarner (NYSE:BWA): Downgraded to Hold at Keybanc; expect a miss

Keybanc is out with a fairly interesting call on BorgWarner (NYSE:BWA) cutting their rating to Hold from Buy

Firm is lowering their earnings estimates to $0.07 from $0.27 for 2009 and to $1.35 from $1.58 for 2010 as they are incrementally concerned that: 1) BWA could report 3Q09 earnings below consensus expectations or that the Street may lower estimates prior to its earnings release, both of which could be a negative catalyst for the stock (Keybanc is lowering their 3Q09 estimate to $0.10 from $0.18; First Call mean is $0.13); 2) negative factors affecting 2Q09 and 3Q09 earnings could persist for several more quarters; and 3) potential weakness in stock price could present long-term investors with a more attractive entry point given the solid longer-term fundamentals at BWA.

Firm believes that the negative factors affecting 2Q09 and 3Q09 earnings (i.e., negative product mix, lower profitability in Europe, sluggish commercial vehicle sales, higher than expected interest and incentive compensation expense) could persist for several quarters before dissipating and becoming tailwinds in 2010.

- Keybanc now believes that increased production in A and B segment vehicles driven by European scrappage programs is masking the traditional seasonal declines in higher-end vehicles where BWA has majority of its content. So while European production is currently forecast to decline sequentially 2Q09 to 3Q09 by 4%, they expect BWA sales to decline by 8%. They do not believe the lowered expectations can be offset by North America, as improved production expectations are primarily driven by "Cash for Clunkers". Part of the sales declines may be offset by the increasing Euro, although limited profitability in Europe negates its impact to operating income.

- They believe investors may be particularly sensitive to lowered expectations given disappointing 2Q09 results and the overall positive sentiment for the rest of the group. Following better than expected reports from Johnson Controls (JCI-NYSE), Autoliv (ALV-NYSE) and Gentex (GNTX-NASDAQ), BWA reported 2Q09 recurring results of a loss of $0.05, which was significantly below both firm's estimate of $0.09 and the First Call mean estimate of $0.07. Sales declined 40% year-over-year to $916 million, well below Keybanc's estimate of $973 million and the First Call mean estimate of $970 million

While near-term Keybanc is incrementally concerned over worse than expected results, they continue to believe that longer-term BWA results will outperform expectations. As such, they believe that potential weakness in the stock price could present longer-term investors with a more attractive entry point than current levels.

Notablecalls: First of all, note that Autoliv (ALV) raised guidance this morning. So far, the stock is doing nothing. This is a tell.

I think BWA will work today to the downside as:

- Keybanc has a pretty good track record when it comes to auto parts.

- They are calling for a miss. Around these levels, this is unacceptable. People will be looking to book profits.

I think BWA can do 1-1.5 pts to the downside in the very s-t.

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