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
(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
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 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
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 outGraco Inc.
(Zacks Rank #1) orColfax Corp.
(Zacks Rank #2).
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