Sometimes you can have a good company that finds its stock a
bit ahead of itself, which is what I think we are seeing here in Barnes Group,
today’s Bear of the Day.
If you are not familiar, Barnes Group (B - Snapshot Report) (Zacks Rank #5) is an international
aerospace and industrial manufacturing and services provider, serving a wide
range of end markets and customers. The products and services provided by the company
are used in far-reaching applications that provide transportation,
communication, manufacturing and technology to the world.
Many of their products are highly engineered, high quality
(high price) products for those industries.
In a world that is seeing slowing growth on the downswing rather than
the rise, I am concerned that the 50% rise in share price and 19 times
multiple might be a little rich. I have no doubt the company will
continue to sell its components, but their growth looks questionable in
the second quarter.
Barnes generates roughly 20% of its sales in Europe, 18% in Asia
and 62% in the Americas.
Last Earnings Report
Barnes Group reported Q1 adjusted earnings per share of 40
cents, up roughly 25% year over year in late April; the results fell 11.1%
short of the Zacks Consensus Estimate for 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.
Of bigger concern was Barnes’ anticipation of recording
income tax charges to the tune of $20 million in the current quarter and the
company’s cash flows are expected to be negatively impacted by $13 million
related to an unfavorable tax ruling.
While the stock price has been moving higher, analysts’
expectations have been doing the opposite.
Most of the analysts that cover moved estimates lower since their
last earnings report, with the current quarter’s results dropping from 54 cents
to the current 46 cents. FY2013 estimates
also came down 11.2% from $2.14 per share to $1.90.
Barnes is expected sales to decrease 1.42% for FY2013, but
for earnings to increase 12% on cost cuts and efficiency. Given their tax situation, margin issues and
declining economic conditions, I wonder if they will be able to meet those
Barnes has missed earnings expectations 3 of the last 4 quarters
by an average of 4% and yet the shares continue to outperform.
While Barnes is still a great company, its Zacks Rank of 5
(Strong Sell) coupled with the negativity amongst analysts makes it a little
risky for my blood. If you are looking
for a unique industrial company, you might check out Graco Inc. (GGG - Snapshot Report) (Zacks Rank
#1) or Colfax Corp. (CFX - Analyst Report) (Zacks Rank #2).
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