BorgWarner has the pieces for a bull market

I first covered BorgWarner (NYSE:BWA) on January 5, 2022 in “BorgWarner is a top choice for EV growth.” In summarizing BorgWarner last January, I made the following observation:

BorgWarner is a top-tier supplier serving the world’s leading automotive manufacturers. The cyclical upturn in transportation production looks to be the most powerful in some time, while the EV super cycle has reached the inflection point of its S curve.

Risk/Reward Rating: Positive

While BorgWarner remains the leading supplier to the world’s top automotive manufacturers, the cyclical upturn referenced above has been stunted by the rapid increase in interest rates. Autos are interest rate sensitive as they are financed by the vast majority of consumers. The following chart, courtesy of the St. Louis Federal Reserve, displays the cyclical deceleration in total US vehicle sales since Q3 2021.

Source: St. Louis Federal Reserve

The following chart zooms in and places the current cyclical contraction in the context of the past 10 years.

Source: St. Louis Federal Reserve

From a historical perspective, the equilibrium rate in the US vehicle market is 17 to 18 million units sold per year. Since Q3 2021, the annual sales pace has fluctuated between 12.5 and 15.5 million units with a central tendency near 14 million. This is 20% below the equilibrium rate during recent economic expansions.

The current US sales rate is consistent with the US auto market being in a recession for the past 16 months. Importantly, BorgWarner is a globally diversified supplier. From the January 2022 report:

Notice the geographic diversification of the company’s production facilities which are evenly split across the three primary regions of the world. Additionally, the company’s largest customers account for only 13% and 11% of sales with the top ten accounting for only 64% of sales… BorgWarner counts nearly all major global auto manufacturers as clients.

The current vehicle recession in the US is mirrored globally. The following chart of global vehicle sales through Q3 2022 is from David Leggett‘s article “Global vehicle market sales rate falls back” on JustAuto. The chart suggests that the current cycle is within a larger 5-year downtrend in vehicle unit sales globally.