Stock Analysis – BorgWarner (BWA) – Breakout, Whoosh, Short Squeeze

Tuesday, January 10, 2012 11:36 am



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StocktoberFest – Horowitz & Company’s QFT Analysis on BorgWarner (BWA).  

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BorgWarner (BWA) put out some pretty smashing numbers today in a pre-earnings announcement/guidance. Also not that there is a heft short-interest ratio on this company.

Briefing.com: Borg Warner issues upside FY12 EPS guidance; in line FY12 revenue guidance
Co sees EPS of $5.35-5.65 vs. $5.21 Capital IQ Consensus Estimate; sees FY12 (Dec) revs of +10-12% versus ~12% Capital IQ consensus estimate. “In 2012, we expect another record year for sales and earnings…Our strong backlog of net new business is expected to drive sales growth of 10% to 12% in 2012 compared with 2011. Excluding the negative impact of foreign currencies, our sales growth is expected to be 14% to 16% while global light vehicle production is expected to grow only 6%, and European light vehicle production is expected to decline approximately 4%, during the same period. Demand for our product technologies that improve fuel economy, emissions and performance, continues to accelerate around the globe.” The company expects its 2012 operating income margin to be 11.5% or better, which would be a new record. The expectation of improved margins can be largely attributed to restructuring actions taken in 2008 and 2009.

Horowitz & Company’s proprietary Technical Scoring System (T|score) takes into consideration both individual security technicals as well as the overall market direction when considering whether or not to purchase a company. H&C’s Market Trend Indicator (MTI) is a measure which is designed to evaluate the overall trend in the market. There are four designated levels to assess the trend which include: Strong Downtrend, Downtrend, Rally and Strong Rally. We are currently in an environment where the MTI is in a Strong Rally. All of our indicators are showing that the markets are in a strong rally and risk is back on. Investors of all risk tolerances may consider moving to a higher level of equities while still looking to pick up companies with increased levels of technicals. With that said, this stock ranks in the mid to high percentile of stocks from an individual security technical score. H&C would not consider purchasing this position in a Strong Downtrend and would have to make a pretty good case to purchase it in a Downtrend. H&C would be looking for an entry point during a Rally and would have no problem entering this position during a Strong Rally to bring up equity exposure.

Below are some of the areas where Borgwarner Inc (BWA) excelled or detracted from the value of the technical score:

Stochastics are currently showing some bearish attributes which may mean this stock is slightly overbought in the short run.

Borgwarner Inc (BWA) over the past two weeks has recently crossed above its 50 day moving average. We see this as a bullish sign as the momentum is starting to change.

In terms of price and volume especially over a short period of time it is important to see if there is any weight behind either a rally or correction. This company has shown to have less than favorable price action in terms of volume and therefore has a greater chance to move lower if the overall market and economy are to trend lower. Higher volume with negative price also will provide resistance levels for this position if it were to increase back to these levels.

On a 12-month rolling period this company has not performed as well when comparing against its peers and equities in the S&P 1500. We see this as a negative sign for this company as it shows weakness relative to the overall market

H&C currently sees Borgwarner Inc (BWA) in a Short Term Uptrend and Long Term Uptrend.

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Horowitz & Company’s proprietary Fundamental Scoring System (F|score) takes into consideration many factors related to each company’s financial history and outlook. This system is oriented toward a growth model and therefore will give a higher score to those companies which continually show increasing earnings per share and revenue over time. Over the long-run (and when looking to purchase a security) we prefer companies with a track record of growth and solid fundamentals. In the short-term however, it is price / technicals that pay. When investing, we combine both of these analyses to seek out possible investment opportunities within our universe of stocks.

This stock ranks very highly with regard to fundamental factors and could be considered a candidate. See below for details on where this company thrives and possibly some of its drawbacks:

We find that EPS Growth on a Quarter over Quarter basis is one of the strongest components when screening for growth stocks. Continued EPS Growth in a company generally shows strength in leadership, the ability to manage expenses and improve the bottom line.Over the last three quarters, this company has done exceptionally well producing EPS Growth Rates last quarter, 2 quarters ago and 3 quarters ago 64.29%, 44.87%, 53.85% respectively.

Revenue Growth similar to EPS Growth is also a strong component to consider when screening and scoring for growth companies. Continued growth in revenue shows that the company is innovative, marketable and its products remain relevant in the marketplace.Over the last three quarters, this company has done exceptionally well producing Revenue Growth Rates last quarter, 2 quarters ago and 3 quarters ago 27.00%, 27.93%, 34.47% respectively.

The 5 Year EPS Growth Rate has detracted from the fundamental score with a value of 8.05

Last quarter this company reported Earnings Per Share 10.9% better than analysts had expected. We believe this surprise although only for one quarter could set a trend for future earnings reports and guidance.

Price relative to earnings growth is commonly referred to as the PEG Ratio. This company may contain added value as it’s PEG Ratio is 0.64. We generally would like to see the PEG ratio under 1.5 and it is even better if it is under 1.0.

(Horowitz & Company clients added a position of BWA today)

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Looking to invest in The Disciplined Investor Managed Growth Strategy?
Click HERE for the virtual tour….

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