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Borg WarnerBorg Warner
April 28April 28thth, 2005, 2005
By: Tom SmithBy: Tom Smith
Presentation OverviewPresentation Overview
Overview of CompanyOverview of Company Macroeconomic ConditionsMacroeconomic Conditions Relevant Financial DataRelevant Financial Data View Excel SheetView Excel Sheet Future outlooks for company and industryFuture outlooks for company and industry Wrap-upWrap-up
Overview of Borg WarnerOverview of Borg Warner
Borg Warner Corporation formed in 1928 by Borg & Borg Warner Corporation formed in 1928 by Borg & Beck, Warner Gear, and 2 other companiesBeck, Warner Gear, and 2 other companies
Became private in 1987 and returned as a separate Became private in 1987 and returned as a separate independent company in 1993independent company in 1993
Company specializes in innovating and creating Company specializes in innovating and creating components to help improve engines and components to help improve engines and transmissions mainly for automobilestransmissions mainly for automobiles
14,500 employees14,500 employees Headquartered in Auburn Hills, MichiganHeadquartered in Auburn Hills, Michigan
StrategyStrategy
VisionVision Leader in advanced products and technologies that Leader in advanced products and technologies that
satisfy customer needssatisfy customer needs Innovation & International GrowthInnovation & International Growth
From CEO Timothy Manganello: “ Our From CEO Timothy Manganello: “ Our technology, our customer diversity, our financial technology, our customer diversity, our financial discipline, and our staunch commitment to product discipline, and our staunch commitment to product leadership have built us a strong foundation for leadership have built us a strong foundation for continued global growth.”continued global growth.”
What Makes Borg Warner a Good What Makes Borg Warner a Good Company?Company?
Constant Product Innovation to satisfy Constant Product Innovation to satisfy customerscustomers
Diversified International GrowthDiversified International Growth
Good Corporate GovernanceGood Corporate Governance
ProductsProducts
Engine GroupEngine Group Develops strategies and products to manage Develops strategies and products to manage
engines for fuel efficiency, reduced emissions, and engines for fuel efficiency, reduced emissions, and enhanced performanceenhanced performance Chain Products – automotive chain systemsChain Products – automotive chain systems Boosting System – Turbochargers (15% fuel Boosting System – Turbochargers (15% fuel
economy improvement)economy improvement) Emissions and Thermal Systems – Control Emissions and Thermal Systems – Control
emissions, engine air and thermal managementemissions, engine air and thermal management Beru Technologies – Diesel cold start technologyBeru Technologies – Diesel cold start technology
ProductsProducts
Drivetrain GroupDrivetrain Group Innovates transmission & 4-wheel drive Innovates transmission & 4-wheel drive
technology with control systemstechnology with control systems Transmission Products – “Shift” quality Transmission Products – “Shift” quality
components and systems (used with automatic components and systems (used with automatic transmissions as well)transmissions as well)
Torque Management – Torque Distribution and Torque Management – Torque Distribution and Management systems to enhance drivability, Management systems to enhance drivability, stability, and handling.stability, and handling.
Recent Product InnovationsRecent Product Innovations
Product InnovationProduct Innovation Focused products on fuel efficiency and engine Focused products on fuel efficiency and engine
efficiency efficiency Won 2005 Automotive News PACE award for Won 2005 Automotive News PACE award for
Industry-First DualTronic Transmission Industry-First DualTronic Transmission TechnologyTechnology
Discussed Variable Cam Timing, a technology that Discussed Variable Cam Timing, a technology that is becoming popular globallyis becoming popular globally
VCT technology to grow 500% from 5.2 Million engines VCT technology to grow 500% from 5.2 Million engines to 26 million engines by 2009to 26 million engines by 2009
Diversified International GrowthDiversified International Growth
Located in 17 different countriesLocated in 17 different countries
Products shipped to all over globe for various Products shipped to all over globe for various car manufacturerscar manufacturers
Recent acquisition of German Company Beru Recent acquisition of German Company Beru AG helps diversify operationsAG helps diversify operations
CustomersCustomers
Borg Warner is very well diversified with Borg Warner is very well diversified with many different customers across the globemany different customers across the globe 3.5 Billion in Sales:3.5 Billion in Sales:
1.95 Billion from the U.S1.95 Billion from the U.S 1.25 Billion from Europe1.25 Billion from Europe .3 Billion from Other Countries.3 Billion from Other Countries
Do not rely too heavily on one customerDo not rely too heavily on one customer Ford is biggest with 16% of salesFord is biggest with 16% of sales
CustomersCustomers
BMW
International
John Deere
PSA
ZF
Caterpillar
Honda
Hyundai/Kia
Renault/Nissan
Toyota
VW/Audi
GM
DamilerChysler
Ford
All Others
10%
16%
11%
7%
10%
6%
6%
Customer DiversityCustomer Diversity
Strong Corporate GovernanceStrong Corporate Governance Corporate Governance CommitteeCorporate Governance Committee
Determine qualifications for Board MembersDetermine qualifications for Board Members Develop Corporate Governance Principles that Board Develop Corporate Governance Principles that Board
Members adopt for companyMembers adopt for company Finance & Audit CommitteeFinance & Audit Committee
Monitor integrity of Financial StatementsMonitor integrity of Financial Statements Monitor Independence of Auditors (external/internal)Monitor Independence of Auditors (external/internal)
Code of EthicsCode of Ethics Corporate Governance Quotient Better than Corporate Governance Quotient Better than
90.8% of S&P 400 companies and 95% of 90.8% of S&P 400 companies and 95% of automobile and components companiesautomobile and components companies
Macroeconomic ConditionsMacroeconomic Conditions
Overall Outlook for the auto industry is Overall Outlook for the auto industry is negative for 2005, especially in North Americanegative for 2005, especially in North America GM tightening grip on suppliers because of low GM tightening grip on suppliers because of low
profits, lost $1.1 billion in 1profits, lost $1.1 billion in 1stst quarter 2005 quarter 2005 Car Manufacturers cutting production in 2005 due Car Manufacturers cutting production in 2005 due
to excess capacity alreadyto excess capacity already Raw material prices for steel and aluminum Raw material prices for steel and aluminum
reached highs in 2004 due to many factorsreached highs in 2004 due to many factors shortage of certain raw materialsshortage of certain raw materials
CompetitorsCompetitors
Main 4 CompetitorsMain 4 Competitors Eaton CorpEaton Corp Delphi CorpDelphi Corp Dana CorpDana Corp Honeywell InternationalHoneywell International
Competitors are struggling as car industry Competitors are struggling as car industry outlook appears bleakoutlook appears bleak Dana Corp profits down, Delphi’s debt rating have Dana Corp profits down, Delphi’s debt rating have
recently been cut (BB – 2recently been cut (BB – 2ndnd highest Junk Level) highest Junk Level)
CompetitorsCompetitors
Most competitors are involved in other parts of Most competitors are involved in other parts of car industry or other industries all togethercar industry or other industries all together Eaton also provides servicing of fluid power systems Eaton also provides servicing of fluid power systems
for industrial, mobile, and aircraft equipmentfor industrial, mobile, and aircraft equipment Delphi provides automotive electronics, halfshafts, Delphi provides automotive electronics, halfshafts,
condensers, batteries, filters, spark plugs, generators condensers, batteries, filters, spark plugs, generators and compressors and compressors
Dana Corp provides chassis and vehicle architecture Dana Corp provides chassis and vehicle architecture technologiestechnologies
Honeywell focused in aerospace and defense Honeywell focused in aerospace and defense industryindustry
Porter’s Five Forces AnalysisPorter’s Five Forces Analysis
Bargaining Power of Buyers = HighBargaining Power of Buyers = High Bargaining Power of Suppliers = HighBargaining Power of Suppliers = High Threat of Substitutes = LowThreat of Substitutes = Low Threat of New Entrants = ModerateThreat of New Entrants = Moderate Industry Rivalry = ModerateIndustry Rivalry = Moderate
Borg Warner vs. Auto Borg Warner vs. Auto IndustryIndustry
Sales Growth for past decadeSales Growth for past decade
Relevant Financial StatisticsRelevant Financial Statistics Key StatisticsKey Statistics
Market Cap. = 2.57 BillionMarket Cap. = 2.57 Billion P/E = 11.79P/E = 11.79 PEG ratio = .83PEG ratio = .83 Profit Margin = 6.45%Profit Margin = 6.45% ROA = 6.97%ROA = 6.97% ROE = 15.67%ROE = 15.67% Revenue Growth = 14.9% on $3.53 BillionRevenue Growth = 14.9% on $3.53 Billion Net Income = $218 MillionNet Income = $218 Million Total Debt = $584.5 MillionTotal Debt = $584.5 Million Beta = .983Beta = .983 Div Yield = 1.22%Div Yield = 1.22%
Financial Data Comparison with Financial Data Comparison with CompetitorsCompetitors
Borg WarnerBorg Warner Market Cap. = 2.57 BillionMarket Cap. = 2.57 Billion P/E = 11.79P/E = 11.79 Profit Margin = 6.45%Profit Margin = 6.45% ROE = 15.67%ROE = 15.67% Revenue Growth = 14.9%Revenue Growth = 14.9% Debt = $584.5 MillionDebt = $584.5 Million
Dana CorpDana Corp Market Cap. = 1.74 BillionMarket Cap. = 1.74 Billion P/E = 29.2P/E = 29.2 Profit Margin = .39%Profit Margin = .39% ROE = 2.7%ROE = 2.7% Revenue Growth = 11.40%Revenue Growth = 11.40% Debt = $2.35 BillionDebt = $2.35 Billion
EatonEaton Market Cap. = $10.77 BillionMarket Cap. = $10.77 Billion P/E = 13.8P/E = 13.8 Profit Margin = 6.85%Profit Margin = 6.85% ROE = 20.98%ROE = 20.98% Revenue Growth = 21.80%Revenue Growth = 21.80% Debt = $2.1 BillionDebt = $2.1 Billion
Honeywell InternationalHoneywell International Market Cap. = $30.93 BillionMarket Cap. = $30.93 Billion P/E = 23.28P/E = 23.28 Profit Margin = 5.20%Profit Margin = 5.20% ROE = 12.11%ROE = 12.11% Revenue Growth = 10.80%Revenue Growth = 10.80% Debt = $6.07 BillionDebt = $6.07 Billion
Extra FinancialsExtra Financials
Borg Warner has 229.7 Million in CashBorg Warner has 229.7 Million in Cash Cash from Operations = 426 MillionCash from Operations = 426 Million Total Debt = 584.5 MillionTotal Debt = 584.5 Million Earnings Growth is 14.76% and 20.55% in Earnings Growth is 14.76% and 20.55% in
2003 and 2004 respectively2003 and 2004 respectively
Stock Chart – 1 YearStock Chart – 1 Year
Stock Chart – 5 YearStock Chart – 5 Year
Borg Warner vs. S&P 500 and S&P Borg Warner vs. S&P 500 and S&P 400400
Excel TimeExcel TimeNote: Borg Warner’s income statement does not show separate items for Note: Borg Warner’s income statement does not show separate items for
depreciation and amortization. These numbers were taken from the depreciation and amortization. These numbers were taken from the cash flow sheet and they are assumed to be included within cost of cash flow sheet and they are assumed to be included within cost of goods sold on the income statement.goods sold on the income statement.
Sensitivity AnalysisSensitivity Analysis
Cogs 77% of RevenuesCogs 77% of Revenues Stock Price = 42.13Stock Price = 42.13
Cogs 77% of Revenue, Revenue Growth= 12%Cogs 77% of Revenue, Revenue Growth= 12% Stock Price = 45.26Stock Price = 45.26
Cogs 76% of RevenuesCogs 76% of Revenues Stock Price = 49.21Stock Price = 49.21
Cogs Decrease from 76%-75%, Rev. increase from 10-12%Cogs Decrease from 76%-75%, Rev. increase from 10-12% Stock Price = 54.72Stock Price = 54.72
Cogs 77% of Revenues, Revenue Growth 8%Cogs 77% of Revenues, Revenue Growth 8% Stock Price = 39.17Stock Price = 39.17
As we can see, slight movement up in COGS or down in As we can see, slight movement up in COGS or down in Revenues greatly affects stock price negativelyRevenues greatly affects stock price negatively
Future ExpectationsFuture Expectations
Borg Warner management is very forward Borg Warner management is very forward looking:looking: Predict the number of automated fuel efficient Predict the number of automated fuel efficient
engines in Europe will triple by 2009engines in Europe will triple by 2009 Foresee that commodity prices will decrease Foresee that commodity prices will decrease
because they were at all-time highs in 2004because they were at all-time highs in 2004 Sales in China and India expected to increase 5-Sales in China and India expected to increase 5-
fold over next 5 yearsfold over next 5 years
Future ExpectationsFuture Expectations
Continued focus on cost improvementsContinued focus on cost improvements Production and procurement of raw materialsProduction and procurement of raw materials Have built a disciplined cost reduction processHave built a disciplined cost reduction process Have reduced expenses will continuing to invest in Have reduced expenses will continuing to invest in
research and developmentresearch and development
New Company DevelopmentsNew Company Developments
Acquisition of Beru allows Borg Warner to Acquisition of Beru allows Borg Warner to enter and thrive in cold diesel engine segment enter and thrive in cold diesel engine segment of marketof market
Dualtronic technology as mentioned earlierDualtronic technology as mentioned earlier
Threats to CompanyThreats to Company
Overall condition of marketOverall condition of market Suppliers can get crunched and production on automobiles Suppliers can get crunched and production on automobiles
will slow downwill slow down Commodity prices continue to increase or remain highCommodity prices continue to increase or remain high GM and Ford (26% of Sales) are struggling & cutting GM and Ford (26% of Sales) are struggling & cutting
productionproduction Forecasted Sales do not occur at predicted paceForecasted Sales do not occur at predicted pace Exchange Rate hurts companyExchange Rate hurts company
Sales increased heavily in Europe, where Euro was stronger Sales increased heavily in Europe, where Euro was stronger than dollar, in 2003-2004 – generated over 3% of revenue in than dollar, in 2003-2004 – generated over 3% of revenue in 2004.2004.
DecisionDecision
I propose that we put Borg Warner on the I propose that we put Borg Warner on the watch listwatch list Too much risk in cost of raw materialsToo much risk in cost of raw materials Automobile industry is falteringAutomobile industry is faltering Wait till close to end of 2005 to see how well Wait till close to end of 2005 to see how well
company predicted sales and costscompany predicted sales and costs
In ConclusionIn Conclusion
Borg Warner is well positioned for future Borg Warner is well positioned for future global growthglobal growth
Still have backloads for orders from 2004, may Still have backloads for orders from 2004, may be able to get through 2005 downturnbe able to get through 2005 downturn
However, condition in industry and market is However, condition in industry and market is too risky at the momenttoo risky at the moment
Company remains a viable supplier, class Company remains a viable supplier, class should look at it in the fall 2005 semestershould look at it in the fall 2005 semester
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