Preparing for the Dip, Part 1

 | Aug 16, 2013 | 12:30 PM EDT
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Over the last few days of trading, the market has had its biggest two-day drop of the past two months. 10-year Treasuries have posted their highest yield in two years and the decline has occurred on good volume.

I believe we are in a few months of rough sledding and the market feels overbought. While I could go into myriad reasons for this, Real Money Pro's Doug Kass thoroughly the topic earlier in the week.

What I do want to do in numerous columns in the next week or two is talk about some of the areas I do see value in the market. Sectors that still sport reasonable valuations and have some equities within the industry where I would love to deploy some of my dry powder if we can get additional pullbacks in the overall market. Today I want to talk about an auto parts manufacturer.

I believe this sector is in the strongest position it has been in for quite some time. Domestic auto sales are booming and are almost back to pre-crisis levels. China auto production is strong and, after almost two years of contraction, Europe's situation looks to be finally bottoming.

In addition, new domestic fuel efficiency standards are driving the effort to increase the new technology found in vehicles in order to comply with the new policies. Let's take a look at my favorite auto parts maker that is not already in my portfolio. This is on my "shopping list" and I will eagerly add it should an overall market sell-off knock it a few dollars a share lower.

BorgWarner (BWA) manufactures engineered automotive systems and worldwide. Some of the company's products include turbochargers, timing devices and chain products, emissions systems, diesel cold-start, gasoline ignition technology and cabin heaters. The company is well positioned for the fuel efficiency push in the U.S. To give one example, it anticipates light vehicles deployed with turbocharger technology in North America will triple to 3 million vehicles by 2016.

The company continues draw praise from analysts. Robert Baird upgraded the shares to Outperform from Neutral in July on accelerating earnings growth. Jefferies and Citigroup both recently raised price targets on BorgWarner as well. Consensus earnings estimates for both fiscal 2013 and fiscal 2014 have moved up nicely over the last month and the company has beaten bottom-line expectations for three straight quarters. The company also raised full-year guidance when it reported earnings in late July.

The one caveat and headwind on the stock is that approximately half of the company's revenues come from Europe, which has had declining auto sales in recent years. However, Europe does appear it is climbing out of its recent troubles and the continent recently posted positive GDP growth for the first time in seven quarters. In addition, auto registrations rose almost 5% in July, which indicates that auto sales could stabilize and grow in the second half of 2013.

The company has a strong balance sheet and also pays a small dividend of 1%. BorgWarner has grown earnings more than 70% since fiscal 2010 and posted record quarterly earnings last month. Revenue growth is projected to accelerate in 2014. After growing approximately 4% in 2013 due mainly to the weakness in Europe, increases are expected to be in the low teens. The stock is selling at around 15x next year's earnings. BWA is priced at $96 a share; it would be a "gift" if a market decline brought in into the $90 range.

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