Tuesday, June 15, 2010

Morgan Stanley & UBS Upgrade Auto sector, Including BorgWarner (BWA)

It is strange to see auto suppliers gapping up and such... such a staid business, but in 'student body left' trading as long as the market is happy (almost) all stocks are the same stock to the computers.  On days like today when countless stocks gapped up, it was difficult to discern that there actually was a catalyst other than "everything must be bought", but the sector was upgraded by both Morgan Stanley & UBS; including fund holding BorgWarner (BWA).  TRW Auto (TRW) which was another name in the group I considered also was upgraded, and both have bounced smartly lately and look much better technically  now.

Morgan Stanley's generic upgrade via Marketwatch:
  • The auto industry view was raised to attractive at Morgan Stanley on Tuesday, including buy recommendations on Johnson Controls  (JCI), BorgWarner (BWA), and TRW Automotive (TRW).  
  • The investment bank boosted annual earnings expectations by about 25% for 2010 to 2012, leading to higher sustainable margins for the sector. With better-than-expected profits in recent quarters, Morgan Stanley says the auto suppliers have made structural improvements that outweigh recent sell-offs over news from Europe.
  • US SAAR has been running at approx. 11.2 mm units in 1H2010, which is slightly above the 4Q09 run rate of 10.9 mm. Despite the sequential improvement and the start of a V-shaped recovery, the pace of recovery in the SAAR has been a bit slower than Morgan Stanley had hoped reflecting the impact of adverse weather conditions and the Toyota recall related sales stoppage in Jan-Feb and the choppy nature of the economic recovery.

    While the market nowadays treats all stocks in the sector the same since computers only buy sectors and individual names mean nothing, there is a good story brewing specific to BorgWarner. 

    UBS was much more specific focusing on BorgWarner:
    • UBS is out with a lengthy note titled: "Which Technologies Will Benefit Most from Fuel Economy Regulation?" In this report, they have identified the lowest cost technologies needed to meet US fuel economy targets. Based on their analysis, they forecast that dual clutch transmissions (DCTs) and turbochargers will have the best growth prospects. The firm is raising their 2012 to 2014 EPS estimates for Borg Warner (NYSE:BWA) to reflect the outsized growth of these technologies.
    • According to UBS, BWA currently has a 35% share in turbos and is the only global supplier of wet DCTs. Consequently, BWA’s organic growth should significantly exceed that of the industry. UBS forecasts that BWA’s sales will double in the next 4 years.
    [May 10, 2010: Beginning Stake in BorgWarner]
        Long BorgWarner in fund; no personal position

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