In the inaugural issue of Capitalist Times Premium, we made the case for rotating capital from traditionally defensive sectors such as consumer staples and into cyclical groups such as energy, industrials and technology.
The rationale behind this strategic positioning: Although US gross domestic product grew at an anemic pace in the first half, a number of indicators suggest that the economy will expand at an accelerated rate in the back half of the year. (See Riding the Cycle.)
We refined this top-down analysis by drilling down into each sector to identify industry-specific growth trends and the names that stand to benefit the most from these developments. Thus far, our picks in the energy and industrial sectors have outperformed–and second-quarter results suggest there’s more upside to come.
BorgWarner (NYSE: BWA), the top-performing stock in our Wealth Builders Portfolio, in the second quarter posted year-over-year revenue growth of 3 percent when you exclude the effect of currency exchange rates and asset dispositions.
But the improvement in profitability was the big story from the company’s July 25 earnings release: Despite low production levels of light and commercial vehicles in Europe, BorgWarner managed to post a record quarterly operating profit margin of 12.9 percent–an improvement of 40 basis points from year-ago levels. This achievement is particularly impressive when you consider that management had previously indicated that 8 percent to 10 percent sales growth would be needed just to maintain operating profit margins.
With BorgWarner converting of its revenue to profits, the company generated adjusted earnings of $1.50 per share in the second quarter, topping the Bloomberg consensus estimate of $1.41 per share.
Management also outlined the case for this strength to continue into the second half of the year, upgrading its forecast for 2013 vehicle production growth to 2 percent from 1 percent. The robust North American market, where volumes are expected to grow by 5 percent instead of 3 percent, will drive much of this upside. Commercial-vehicle volumes in China also appear set to match last year’s levels–a welcome improvement from management’s initial forecast for a double-digit decline.