BorgWarner (BWA) – Revenues of $2.3 billion fell 11% from a year ago while adjusted per-share earnings of $0.77 were 23% weaker. Lower profits were primarily due to lower revenues along with slightly increased research and development spending. Earnings were well-ahead of consensus estimates. Overall, the results indicate that BorgWarner is doing reasonably well in adjusting to the new environment, and is generally favorably positioned in the faster growing segments of the auto industry and in the emerging electric vehicle market.
The company provided full-year 2020 guidance (rare in this pandemic era), indicating that organic (excluding acquisitions, divestitures and currency) revenues would decline between 20% and 27% while operating cash flow would be between $530 million to $780 million, or $100 million to $300 million after capital spending. BorgWarner had $901 million in cash on hand and considerable borrowing capacity so its liquidity appears strong.
BorgWarner’s pending acquisition of Delphi is back on again with moderately improved terms. We are not big fans of this deal. While there perhaps is some strategic value from bulking up in the electric vehicle segment and some financial value from cost-cutting, it appears to be more of an overpriced diversification move. Issuing undervalued shares to pay for an overvalued company doesn’t make a lot of sense. The deal drags with it $1.4 billion in Delphi debt, which is even more than much-larger BorgWarner currently carries. Somewhat confounding as well, BorgWarner reiterated their commitment to their $1 billion share repurchase program, which would entail repurchasing nearly all of the shares that it will issue to buy Delphi, but probably at higher prices. Similarly, the company continues to spend $140 million/year on its cash dividends. We wonder what is going on at the BorgWarner capital allocation meetings.
For now, BorgWarner’s shares appear to overly-discount its future, so we are retaining our Buy rating, but reducing our price target to $40 to reflect its weaker future compared to our initial assumptions.
The Mosaic Company (MOS) – Revenues of $1.8 billion were 5% below a year ago, while the adjusted per-share net loss of ($0.06) compared to an adjusted per share profit of $0.25 a year ago. Adjusted EBITDA of $214 million was down 50% from a year ago. Both revenues and per-share earnings were ahead of consensus estimates. Overall volumes were up 14% compared to a year ago. Prices, however, were much weaker, which drove the decline in profits.
Volumes of its North American potash (+2%) and phosphates (+7%) fertilizers were higher than a year ago. Encouragingly, the company said that April volumes have surged, as stronger North American demand indicates that crop season is shaping up to be normal compared to weak conditions a year ago. The lack of a Chinese contract held back some volume growth, but with that contract now signed demand is returning. These improvements are helping to work down industry inventories and tighten prices. One emerging risk is that considerable North American fertilizer volumes are used to grow corn for ethanol-based fuels, so with the price of all fuels likely to remain weak, demand for ethanol fuels and the related government price supports may weaken.
The Brazil operations produced 5% higher revenues and 12% higher segment profits on stronger demand (+36% volume) and more cost-cutting, although prices were soft.
Overall, Mosaic is ahead of its cost-cutting targets across all operations. Near-term, lower rail traffic has reduced rail prices, which reduces Mosaic’s transportation costs. The company had $1.1 billion in cash, funded by better working capital and large short-term borrowings, so its liquidity is healthy. An additional $170 million will flow into Mosaic from tax refunds and a closed-out swap. Long-term debt remains unchanged from year-end.
Mosaic’s shares discount an uninspiring future. We believe that not only will the company survive but will also prosper. However, we are reducing our price target to $27 (from $55) to reflect the structural changes in the fertilizer supply/demand market.