BorgWarner (BWA) To Sell Non-Core Thermostat Unit For EUR24M

BorgWarner Inc. (NYSE:BWA) announced that it will sell off thermostat business to Arlington Industries Group Ltd. for approximately €24 million. The deal includes two production hubs situated at Piracicaba, Brazil and Oberboihingen, Germany. Subject to customary closing conditions, the deal is anticipated to close in the first quarter of 2019.

BorgWarner added exhaust gas recirculation valve, and thermostat business to its portfolio, through the acquisition of Gustav Wahler GmbH & Co. KG in 2014. Changing market demand over the years has led to various product developments in the thermostat unit. However, the unit’s offerings make it a non-core business for BorgWarner that focuses on propulsion systems for vehicles. Reportedly, the variance in product offerings has impelled BorgWarner to sell off the business. Last year, the business was anticipated to generate roughly €110 million in net sales. Further, the unit sales in the first quarter will incur a loss of approximately $20-30 million for BorgWarner.

Divesting the thermostat business will help BorgWarner to part ways with a non-core business and focus on the developing technically-enhanced propulsion systems, in view of changing demand of the market.

BorgWarner Inc. Price and Consensus

The company has strong cash flow owing to new business wins across the world. Apart from generating positive cash flow, it also considers business wins as a key prospect for long-term growth. Further, the company has set a target of $1 billion in free cash flow by 2023 on the back of new business wins, alongside launching new products. For 2018, it anticipates free cash flow within $550-$575 million, despite high working capital pressures and tax payments.

In third-quarter 2018, the company’s revenues rose 2.6% to $2.5 billion, driven by remarkable growth in North America and single-digit growth in China. Moreover, its commercial vehicle and off-road products witnessed a positive revenue trend in Europe, offset by light vehicle sales. BorgWarner delivered earnings of $1 per share in third-quarter 2018, beating the Zacks Consensus Estimate of 99 cents.

Nevertheless, market volatility and uncertain industry volumes are concerns for the company in fourth-quarter 2018. In fact, this has compelled BorgWarner to reiterate its 2018 guidance for organic growth. For 2018, it projects net sales of $10.49-$10.58 billion, which implies organic growth of 4.5-5.5%, and earnings per share within $4.35-$4.40.

Price Performance

Over the past three months, shares of BorgWarner have lost 16.3% compared with the industry’s decline of 21.2%.

Zacks Rank & Key Picks

BorgWarner currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the broader auto sector are Bridgestone Corporation (OTC:BRDCY) , CarGurus, Inc. (NASDAQ:CARG) and Daimler AG (OTC:DDAIF) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Bridgestone has an expected long-term growth rate of 4.7%. Share price of the company has increased 3.8% in the past three months.

CarGurus has an expected long-term growth rate of 5%. Shares of the company have gained 9.4% in the past year.

Daimler has an expected long-term growth rate of 2.7%. Over the past month, shares of the company have gained 3.1%.

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