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TriMas (TRS) to Grapple With Weak Industrial Markets & Costs

Zacks Equity Research

On Dec 11, we issued an updated research report on TriMas Corporation TRS. Although the company will gain from strong pipeline of product and process innovation in the long haul, the current weakness in industrial and upstream oil and gas end markets will weigh on the top line in the near term. Further, margin pressure thanks to higher freight costs, commodity costs and the implementation of tariffs remain near-term headwinds.

 

Weaker-Than-Expected Q3

 

TriMas reported adjusted earnings of 44 cents per share in third-quarter 2019, which missed the Zacks Consensus Estimate of 50 cents and also declined 8% from the prior-year quarter. This can be attributed to rising freight costs, higher effective tax rate and weak end-market conditions that impacted certain of its product lines.

 

The company’s revenues of $237 million lagged the Zacks Consensus Estimate of $243 million. However, the top line improved 6.4% year over year as sales increased across all segments. Organic and acquisition-related sales growth were somewhat negated by impact of unfavorable currency exchange. Continued strength of the aerospace fastener business was offset by weakness in North American industrial and oil and gas extraction end-markets.

 

Sluggish Markets to Impact 2019 Results

 

During the third-quarter conference call, the company lowered earnings per share guidance to $1.75-$1.80 from the prior $1.85-$1.95. This reflects expectations of continued lower-end market demand and less favorable product mix in certain businesses. The company projects organic sales growth of 1.5-2.5% in 2019, lower than the 3-5% guided previously.

 

The Zacks Consensus Estimate for earnings for fiscal 2019 is $1.79, indicating an improvement 2.3% from the prior year. The estimate for revenues for the fiscal is currently pegged at $924 million, suggesting growth of 5.4% from 2018.

 

Demand levels in many of TriMas’ end markets are being impacted by uncertainties related to the U.S-China trade war. This along with the ongoing weakness in the North American industrial markets will constrain the Packaging segment’s top line. Moreover, higher freight and logistic costs will continue to limit margins in the days ahead. TriMas projects organic sales growth guidance for the segment at 0-1% (down from the prior guidance of 3-5%) while operating margin is projected in the range at 20-21% (down from the prior 21-22%).

 

Continued soft demand in the upstream oil and gas end market as a result of lower oil and gas extraction activity in the United States and Canada, and reduced demand for large high-pressure steel cylinders thanks to the softer industrial end markets will continue to weigh on the Specialty Products segment’s sales. Higher freight costs will deter margins. The company expects the segment’s sales to grow 3-4%, down from the prior projection of 4-6%. The segment’s margin is now projected at 9-11%, down from its prior expectation of 11-13%.

 

However, the Aerospace segment is expected to fare better in 2019 backed by strong quoting activity, order intake and new business wins. For 2019, the company anticipates achieving sales growth of 4-5% while operating margins are envisioned in the band of 16% to 17%.

 

Margin Under Stress

 

The company’s results are being impacted by higher commodity costs, particularly steel, aluminum and oil based commodities. It also has to contend with increased tariffs on imported goods.

 

TriMas plans to counter the impact of higher commodity costs and the impact of tariffs, through commercial actions, supply chain management, leveraging global manufacturing footprint and continued management of businesses under the TriMas Business Model. Although this is likely to somewhat mitigate the impact of these incremental costs, it will take some time to implement certain of these countermeasures.

 

Share Price Performance

 

 

Shares of TriMas have gained 10.9% over the past year, compared with the industry’s growth of 14.0%.

 

Zacks Rank & Key Picks

 

TriMas carries a Zacks Rank #5 (Strong Sell).

 

Some better-ranked stocks in the Industrial Products sector are Northwest Pipe Company NWPX, Tennant Company TNC and Sharps Compliance Corp SMED All of these stocks sport a Zacks Rank #1 (Strong Buy), at present. You can see the complete list of today's Zacks #1 Rank stocks here.

 

Northwest Pipe has an expected earnings growth rate of 15.8% for the current year. The stock has appreciated 45% over the past year.

 

Tennant has a projected earnings growth rate of 29.8% for 2019. The company’s shares have rallied 40% over the past year.

 

Sharps Compliance has an estimated earnings growth rate of 500% for the ongoing year. In a year’s time, the company’s shares have gained 24%.

 

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