BorgWarner (NYSE:BWA): Downgraded at KeyBanc

KeyBanc Capital Markets is downgrading BorgWarner (NYSE:BWA) to Hold from Buy:

We are downgrading our rating on BorgWarner Inc. (BWA-NYSE) to HOLD from BUY and lowering our earnings estimates to $0.07 from $0.27 for 2009 and to$1.35 from $1.58 for 2010 as we are incrementally concerned that: 1) BWA could report 3Q09 earnings below consensus expectations or that the Street may lower estimates prior to its earnings release, both of which could be a negative catalyst for the stock (we are lowering our 3Q09 estimate to $0.10 from $0.18; First Call mean is $0.13); 2) negative factors affecting 2Q09 and 3Q09 earnings could persist for several more quarters; and 3) potential weakness in stock price could present long-term investors with a more attractive entry point given the solid longer-term fundamentals at BWA.

We are incrementally concerned that BWA could report 3Q09 earnings below consensus expectations or that the Street may lower estimates prior to its earnings release, both of which could be a negative catalyst for the stock. As such, we are lowering our 3Q09 estimate to $0.10 from $0.18 (First Call Mean $0.13). We believe investors may be particularly sensitive to lowered expectations given disappointing 2Q09 results and the overall positive sentiment for the rest of the group.

We believe that the negative factors affecting 2Q09 and 3Q09 earnings (i.e., negative product mix, lower profitability in Europe, sluggish commercial vehicle sales, higher than expected interest and incentive compensation expense) could persist for several quarters before dissipating and becoming tailwinds in 2010.

We believe that potential weakness in stock price could present long-term investors with a more attractive entry point as we remain confident in solid longer-term fundamentals driven by an improving production environment, a strong new business backlog, and a robust product portfolio.

Action: Estimate cut below consensus might catch some investors as a surprise after all this excitement in the sector, sending the shares lower near-term.

I suspect BWA is going to trade around $32 in the pre-market and it should be considered as entry point for shorts. I expect shares to sell off after the open, possibly close to $31.