We initiate on BWA at Hold with a $37 PT. BorgWarner Inc. is a global supplier of drivetrain, propulsion, and power management systems to OEMs and aftermarket by way of combustion/hybrid/electric platforms. Despite enviable positions in turbo and e-propulsion as the OE industry shifts to electrification, the disconnect between street expectations and operating realities is stunning and cannot be ignored. Our estimates sit 5% below consensus on FY25-26E EBITDA, accounting for more conservative views on NA production growth and on the $1Bn combustion asset divestiture we believe is coming, against a street narrative seemingly still clinging to robust 22% recovery expectations. Margin resilience impressively shines through, with BWA repeatedly withstanding double-digit adj. EBITM% amid softer volumes, but mgmt’s ability to sequence product exit and cost-outs is razor thin as global OE schedules wobble and combustion wind-down nears. We take a conservative valuation approach: we assign a 5.0x FY26E P/EBITDA multiple, citing both a peer discount and a statistical flag that current trading multiples near 5.5x have presaged negative forward returns. While there is clear optionality for upside to come from a better-than- expected EV mix and/or the potential for cost out to exceed headwinds, ongoing uncertainty on the divestiture pace and potential tariff shock need to be mitigated for the street to prove patience. Ultimately, we see risk and reward in balance, with upside limited mostly by elongating execution risk as opposed to ambition – a classic mid-cycle stalemate that mandates discipline over bravado.
Divestment visibility
We note that margin resilience continues to emerge as a recurring theme in the operating narrative.