On Thursday’s edition of Mad Money, Jim Cramer took a look at Borg Warner (BWA) a supplier of engine systems to the auto industry. Automakers are in a precarious position right now with the Cash for Clunkers program having ended, and Cramer took the opportunity to discuss Borg Warner from both the technical and fundamental analysis standpoints. Cramer has always favored fundamentals, so he relies on Dan Fitzpatrick to be his chartist.
“The stock is BWA. Makes turbochargers and torque transfer systems. They make cars run more efficiently and reduce emissions.
Borg Warner’s chart really ugly. It shows the classic example of a stock breaking down. Dan Fitzpatrick, our go-to chartist on CNBC on “The Call” and my colleague at “Real Money” part of thestreet.com site I’m chairman of, he today sent this to me and said, “Jim, this one is a sell.” The breakdown for Borg Warner below its 50-day moving average. This is the moving average so the red line is the moving and this measures the short-term trajectory and this stock has broken through that 50 day.
When that happens, Fitz says you have to sell it. In the past this 50 day has been every time it’s hit that it’s bounced. Every time. But that’s the level where buyers soak up stock because they think it’s gotten too cheap. It now has become what’s known as resistant. He doesn’t think it can get through it. This is where sellers flood the market because they think it’s become so expensive. This is a technical analysis but I know you love it so I’m giving it to you. Fitzpatrick thinks the Borg Warner breakdown is about the end of the government’s auto infused bubble caused by the cash for clunkers program. It’s over and now that the stock’s benefited, all the stocks that have benefited from it, that’s the technical picture.
What about the fundamental? I think the stock is clearly over-inflated by cash for clunkers, it had to break down. It moved up too far too fast. That doesn’t mean the business was over-inflated or its stocks will suffer. It’s just the stock is suffering not the company. Borg Warner is a strong company. It has a great balance sheet. The most recent quarter, the street was looking for a gain, the miss was rational. Lower sales of diesel cars were both temporary problems. The European clunkers program encouraged people to switch from diesel to gasoline cars.
I think the auto industry is coming back. I like the Ford Motor preferred. I also think the whole group has gotten ahead of itself because of the excitement for the program. And Borg Warner at 30 is still pricing in perfection. Unlike most I don’t think car sales are going to fall off the cliff but I don’t think they’ll be robust enough to keep Borg here. I’m with Fitzpatrick on this chart. I think the stock goes lower. But eventually I think it will be worth buying again based on the fundamentals because the auto industry is on the mend and next year will be a better year.” — CNBC’s Mad Money 8/27/2009
From a technicians point of view, the stock has broken down and must be sold. According to Fitzpatrick, there is more seller interest than their is buyer, and the end of the cash for clunkers program is not helping matters. While Cramer says he likes BWA for its strong balance sheet, and he thinks that the auto industry is on the mend despite the end of cash for clunkers. However, while the company is doing fine in his view, the stock is just too expensive and is priced for perfection going forward. That means there is very limited upside in the stock.
At Ockham, we agree on the conclusion that this stock is Overvalued. We are not so optimistic for the near term prospects of the auto industry, as demand will be weaker than it would otherwise have been. We would expect BWA to get a nice lift to earnings for the fiscal third quarter, but automakers are already slashing production in order to not get caught with too much inventory. Unless Borg Warner can sustain the improved earnings from Cash for Clunkers over the rest of the year, which we highly doubt, the program could be close to a wash. In that case, the stock looks rather unattractive. According to our methodology, there is much more risk than potential reward in this stock and we are in agreement with Cramer and Fitzpatrick, stay away from BWA.
For a full recap of Cramer’s Mad Money, visit the show page on Ockhamresearch.com. The chart displayed on the left shows the stocks that were mentioned on Thursday’s show.
