Should Value Investors Consider BorgWarner (BWA) Stock?

Value investing is easily one of the most popular ways to find great stocks in any market environment. After all, who wouldn’t want to find stocks that are either flying under the radar and are compelling buys, or offer up tantalizing discounts when compared to fair value?

One way to find these companies is by looking at several key metrics and financial ratios, many of which are crucial in the value stock selection process. Let’s put BorgWarner Inc. BWA stock into this equation and find out if it is a good choice for value-oriented investors right now, or if investors subscribing to this methodology should look elsewhere for top picks:

PE Ratio

A key metric that value investors always look at is the Price to Earnings Ratio, or PE for short. This shows us how much investors are willing to pay for each dollar of earnings in a given stock, and is easily one of the most popular financial ratios in the world. The best use of the PE ratio is to compare the stock’s current PE ratio with: a) where this ratio has been in the past; b) how it compares to the average for the industry/sector; and c) how it compares to the market as a whole.

On this front, BorgWarner has a trailing twelve months PE ratio of 12.69, as you can see in the chart below:

This level is significantly favorable with the market at large, as the PE for the S&P 500 compares in at about 20.18. If we focus on the stock’s long-term PE trend, the current level puts BorgWarner’s current PE ratio somewhat below its midpoint (which is 15.52) over the past five years, with the number having risen gradually over the past few months.

Further, the stock’s PE also compares favorably with the Zacks classified Auto-Tires-Trucks-Original Equipment industry’s trailing twelve months PE ratio, which stands at 13.00. At the very least, this indicates that the stock is relatively undervalued right now, compared to its peers.

We should also point out that BorgWarner has a forward PE ratio (price relative to this year’s earnings) of 11.99, so it is fair to say that a slightly more value-oriented path may be ahead for BorgWarner stock in the near term too.

P/S Ratio

Another key metric to note is the Price/Sales ratio. This approach compares a given stock’s price to its total sales, where a lower reading is generally considered better. Some people like this metric more than other value-focused ones because it looks at sales, something that is far harder to manipulate with accounting tricks than earnings.

Right now, BorgWarner has a P/S ratio of about 0.97. This is significantly lower than the S&P 500 average, which comes in at 3.06 right now. Also, as we can see in the chart below, this is well below the highs for this stock in particular over the past few years.

If anything, this suggests some level of undervalued trading—at least compared to historical norms.

Broad Value Outlook

In aggregate, BorgWarner currently has a Zacks Value Style Score of ‘B’, putting it into the top 40% of all stocks we cover from this look. This makes BWR a solid choice for value investors, and some of its other key metrics make this pretty clear too.

For example, its P/CF ratio (another great indicator of value) comes in at 6.21, which is somewhat better than the industry average of 7.31. Clearly, BWR is a solid choice on the value front from multiple angles.

What About the Stock Overall?

Though BorgWarner might be a good choice for value investors, there are plenty of other factors to consider before investing in this name. In particular, it is worth noting that the company has a Growth grade of ‘A’ and a Momentum score of ‘B’. This gives BWA a Zacks VGM score—or its overarching fundamental grade—of ‘A’. (You can read more about the Zacks Style Scores here >>)

Meanwhile, the company’s recent earnings estimates have been mixed at best. The full-year 2017 has seen one estimate go higher in the past sixty days, compared to two lower, while the full-year 2018 estimate has seen two upward and six downward revisions in the same time period.

This has had a noticeable impact on the consensus estimate, as the full-year 2017 consensus estimate dipped 0.9% in the past two months, while the full-year 2018 estimate declined 2.1%. You can see the consensus estimate trend and recent price action for the stock in the chart below:

BorgWarner Inc. Price and Consensus

 

BorgWarner Inc. Price and Consensus | BorgWarner Inc. Quote

This slightly bearish trend is why the stock has just a Zacks Rank #3 (Hold) and why we are looking for in-line performance from the company in the near term.

Bottom Line

BorgWarner is an inspired choice for value investors, as it is hard to beat its incredible lineup of statistics on this front. However, despite a good industry rank (top 11% out of more than 250 industries), a Zacks Rank #3, makes it hard to get too excited about this company overall. In fact, over the past two years, the Zacks Auto-Tires-Truck-Original Equipment sector has clearly underperformed the broader market, as you can see below:

So, value investors might want to wait for estimates and analyst sentiment to turn around in this name first, but once that happens, this stock could be a compelling pick.

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