My Best Electric Car Inventory to Buy and Maintain

Wall Street and individual investors have an insatiable appetite for all electric vehicles (EVs). Even the most speculative electric vehicle companies, with long-term chances of becoming sustainable companies, are receiving multi-billion dollar valuations. Auto manufacturing has historically been a brutal industry for investors. While electric vehicles can benefit from gaining market share and seeing disproportionate growth in the short term, competition in this sector is getting fiercer every day.

Rather than trying to choose which of these vehicle manufacturers will win the horse race, there is much more value in companies that supply the components to a wide variety of manufacturers at the same time. What stands out today as a likely winner behind the scenes of electric vehicles is BorgWarner (BWA -1.87%). Here’s why its corporate turnaround could make it one of the best buy-and-maintain electric vehicle stocks.

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From turbo to all electric

Most of us can shake various vehicle brands head over heels, but few of us can name the component manufacturers of those vehicles. The 140-year-old company manufactures various transmission components. Its business for decades has been in fuel injectors, turbochargers and other engine components that are centered around the engine’s air intake and exhaust and are important features in commercial and high-performance engines. Ford and Volkswagen now are its biggest customers and together they account for approximately 19% of annual sales.

For decades, BorgWarner has been a fantastic investment. For example, its 20-year total return to the end of 2014 was about three times higher than the S&P500. Since 2015, however, the company’s inventory has taken a hit, due to fears that electric and hybrid vehicles will start to become a larger part of the vehicle fleet and that BorgWarner’s powertrain components will be more needed.

In recent years, however, the company has quietly built a new division that exclusively caters to the electric vehicle market. Through in-house development and acquisitions, it now manufactures utility vehicle batteries, electric transmissions, inverters (the components that translate pedal pitch into electrical transmission), and DC fast charging stations. In the most recent quarter, about 33% of sales came from its electric drive and propulsion division.

It’s “pedal to metal” in electric vehicles here

BorgWarner’s electric vehicle business has been an important growth engine for some time, but higher research and development spending and higher acquisition costs have reduced margins in recent years. That is set to change soon, however, as management predicts big gains in EV-related sales in the coming years.

Management estimates that revenues from batteries, inverters and transmissions will grow at annualized rates of 55%, 55% and 40%, respectively, through 2025. It also expects sales of components for hybrid vehicles to increase by 20% per year over the same period. What’s even more encouraging is that much of this revenue is already accounted for through customer contracts, not just best guesses of what the market will be like.

In addition to these existing projections, management intends to make acquisitions of $2 billion in electric vehicles and divest approximately $3.5 billion of existing businesses to accelerate its exposure to electric vehicles through 2025. One of its recent acquisitions was Rhombus Energy, which has given it exposure to DC fast chargers and is expected to be another high growth market.

A solid company selling at a cheap valuation

It’s true that BorgWarner hasn’t been a big investment in the last decade. Your total return over the last 10 years is just 3%. That said, there are likely reasons for the underperformance, as the company was building its EV business from the ground up, while relying on its existing business to fund the transition. If the company is able to approach management’s growth projections for its electric vehicle division, we should expect a significant improvement in the company’s results.

Today, BorgWarner shares are trading around 9.3 times management’s 2022 earnings forecast and have a dividend yield of 2%. This makes the company one of the few investments that has a significant EV growth advantage, is profitable today, and is trading at a reasonable valuation. This rare combination of qualities in an EV stock should make it a strong contender for any investor looking to buy and hold investments in the EV industry today.

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