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Bear of the Day: Barnes Group (B)

Jared Levy

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 (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 on the rise, I am concerned that the 50% rise in share price and 19 times earnings 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 ReportBarnes 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.

Earnings TrajectoryWhile 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 expectations. 

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 (Zacks Rank #1) or Colfax Corp. CFX (Zacks Rank #2).

Jared A Levy is one of the most highly sought after traders in the world and a former member of three major stock exchanges. That is why you will frequently see him appear on Fox Business, CNBC and Bloomberg providing his timely insights to other investors. He has written and published two tomes, “Your Options Handbook” and “The Bloomberg Visual Guide to Options”.  You can discover more of his insights and recommendations through his two portfolio recommendation services:

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BARNES GRP (B): Free Stock Analysis Report

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