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Zacks Investment Research downgraded Barnes Group Inc. (B - Snapshot Report) to a Zacks Rank #5 (Strong sell) on May 11, 2013.

Why the Downgrade?

Barnes Group reported its financial results for the first quarter 2013 on Apr 26, 2013. The aerospace and industrial manufacturer and service provider reported adjusted earnings per share of 40 cents, up roughly 25% year over year. However, the results fell 11.1% short of the Zacks Consensus Estimate of 45 cents.

Revenue in the quarter grew 18.3% year over year, primarily due to healthy performance in the Industrial segment. The impact of revenue increase was, to a large extent, negated by 10.8% and 61.2% increase in cost of sales and selling and administrative expenses, respectively. Operating income grew a mere 1.4% while operating margin fell 150 basis points. Results also suffered a downward trend because of higher interest expense as well as income taxes.

Talking of the coming quarters, Barnes Group anticipates recording income tax charges to the tune of $20 million in the second quarter 2013. The company’s cash flows in the third quarter which are expected to bear the brunt of the unfavorable ruling of the US Tax Court will be negatively impacted by $13 million. An objection against $16.5 million tax adjustment arising out of IRS audit has been rejected by the court.

All these adverse developments contributed to the downward revision in earnings estimate for Barnes Group. In the last 30 days, the Zacks Consensus Estimate for 2013 has gone down by 10.7% to $1.91 while for 2014, the estimate plummeted 7.6% to $2.19.

Also, Barnes Group has a negative earnings surprise in three of four trailing quarters with an average of -4.0%. Downward revision in earnings estimate as well as negative earnings surprise together with the unfavorable ruling raise skepticism over the financial performance of the company in the quarters to come.

Other Stocks to Consider

Barnes Group currently has a market capitalization of $1.6 billion. Other stocks to watch out for in the industry are Graco Inc. (GGG - Snapshot Report) and Tri-Tech Holding, Inc. , each holding a Zacks Rank #1 (Strong Buy) while DXP Enterprises, Inc. (DXPE - Snapshot Report) has a Zacks Rank #2 (Buy).

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