* Q3 EPS 15 cents; Wall Street view 10 cents
* Sales down 22 pct to $1.03 bln; consensus $1.01 bln
* Sees fourth-quarter, full-year profit
* Shares down 5.3 percent (Adds comments from CEO, analyst's remarks, stock activity, background, byline)
By David Bailey
DETROIT, Oct 28 (Reuters) - BorgWarner Inc (BWA.N) posted a better-than-expected third-quarter profit, reversing a year-ago loss, and the auto parts maker backed expectations for a full-year profit and positive free cash flow.
BorgWarner, which makes turbochargers and transmission components, said it was starting to see signs that the auto industry is slowly coming out of its deep downturn, but the company remained cautious on the pace of the recovery.
Shares of BorgWarner, up 49 percent this year through Tuesday, were down 5.3 percent in midday trading on Wednesday. Auto sector shares are sharply lower this week amid uncertainty about the strength of an industry sales rebound.
"Regardless of the stock falling, it is still one of the best parts suppliers out there, and their products are going to be in demand globally over the next several years," Morningstar analyst David Whiston said.
In North America, car production volume is expected to improve in the fourth quarter from the third quarter, and "I would say probably into 2010," BorgWarner Chief Executive Tim Manganello said in a conference call with analysts.
"Recent announcements from General Motors Co [GM.UL] and Ford Motor Co (F.N) regarding production increases indicate that demand is on the rise and our orders from the Detroit Three support this," he said.
Uncertainty over consumer demand, the expiration of government incentive programs, and other market forces make the outlook in Europe less clear, BorgWarner said.
The company posted net income of $17.2 million, or 15 cents per share, for the third quarter, compared with a net loss of $130.4 million, or $1.12 per share, a year earlier, when it had restructuring charges. Sales fell 22 percent to $1.03 billion.
Analysts on average expected earnings of 10 cents per share on revenue of $1.01 billion, according to Thomson Reuters I/B/E/S.
J.P. Morgan analyst Himanshu Patel said the results topped his expectations but were aided by an "abnormally low" tax rate of 7 percent. But he said earnings would still have topped his forecast if the tax rate had matched his expectations.
Patel has an "overweight" rating on BorgWarner.
Excluding one-time items, operating income fell to $27.5 million from $71.9 million a year earlier. BorgWarner has been restructuring to become profitable at lower sales levels.
Auto parts makers suffered through steep production cuts by automakers in the first half of 2009, especially at General Motors Co and Chrysler.
However, the U.S. government's "Cash for Clunkers" incentive plan boosted U.S. car sales sharply from the last week of July through the first three weeks of August, prompting automakers to increase production to build back inventories.
Manganello said the commercial vehicle market remained near trough levels in the third quarter, but began to show early signs of recovery.
"We saw incremental schedule improvements in North America that may be the beginning of a trend or, at the very least, a shift to higher production rates than we saw in the first half of 2009," he said.
"In Europe, however, volumes were flat and our view is that there will not be much change in the commercial vehicle market in the near term for Europe," Manganello said.
U.S. auto sales were down more than 27 percent through the first nine months of 2009. They have dropped severely in the last two years, to an expected total of just above 10 million vehicles in 2009, compared with 16.1 million in 2007.
BorgWarner shares were down $1.72, or 5.3 percent, at $30.72 in midday trade on the New York Stock Exchange. (Reporting by David Bailey; editing by John Wallace)