Rating Update: Stock Rating D-Negative (11/11/19)-Barnes Group Inc (B).

out_logo_500#01580.jpg

BUSINESS

Barnes Group Inc. operates as an industrial and aerospace manufacturer, and service provider in the United States and internationally. Its Industrial segment offers precision components, products, and systems for applications serving various customers in end-markets, such as transportation, industrial equipment, consumer products, packaging, electronics, medical devices, and energy. This segment also manufactures and supplies precision mechanical products, including mechanical springs, high-precision punched and fine-blanked components, and retention rings; force and motion solutions for sheet metal forming, heavy duty suspension, and other markets; and hot runner systems, mold cavity sensors and process control systems, and precision high cavitation mold for injection molding applications.
out_plist#01580.jpg

INVESTMENT RATING

out_map1#01580.jpg

B is expected to continue to be a Value Builder reflecting capital returns that are forecasted to be above the cost of capital.

Barnes has a current Value Trend Rating of D (Negative).
The Value Trend Rating reflects highly consistent signals from PTR’s two proprietary measures of a stock’s attractiveness. Barnes has a neutral Appreciation Score of 46 and a neutral Power Rating of 42, triggering the Negative Value Trend Rating.

Barnes’ stock is selling below targeted value. The current stock price of $60.45 compares to targeted value 12 months forward of $65.
This neutral appreciation potential results in an appreciation score of 46 (54% of the universe has greater appreciation potential.)
out_pt#01580.jpg

Barnes has a Power Rating of 42. (This neutral Power Rating indicates that Barnes’ chances of enjoying attractive investment performance over the near to intermediate term are only average.)
Factors contributing to this neutral Power Rating include: earnings estimate behavior for Barnes has been slightly negative recently; and recent price action has been neutral. An offsetting factor is is currently in a modestly favorable positi.

INVESTMENT PROFILE

Barnes’ financial strength is above average. Financial strength rating is 68.
out_pfit1#01580.jpg

Relative to the S&P 500 Composite, Barnes Group Inc has moderate Value characteristics; its appeal is likely to be to investors neutral towards Income; the perception is that B is higher risk. All factors are relative weaknesses. Relative weaknesses for Barnes include: high stock price volatility, and low historical growth. Barnes’ valuation is moderate: low dividend yield, moderate P/E ratio, and moderate price/book ratio. B has unusually low market capitalization.

CURRENT SIGNALS

Barnes’ current operations are strong. Return on equity is rising, reflecting: and rising tax keep rate.

Barnes’ current technical position is very strong. The stock price is in a 2.6 month up move. The stock has appreciated 39.8% from its prior low. The stock price is above its 200 day moving average which is in an uptrend.

ALERTS

The stock is currently rated D.
Barnes Group Inc (NYSE: B) stock enjoyed a major increase of 60.8% on 11/11/19. The shares closed at $2.09. However, unusually low trading volume at 58% of normal accompanied the advance. The stock has performed in line with the market over the last nine months and is unchanged during the last week.

CASH FLOW

In 2018, Barnes experienced a very significant reduction in cash of -$44.6 million (-31%). Sources of cash were much lower than uses. Cash generated from 2018 EBITDA totalled +$336.9 million. Non-operating uses consumed -$17.9 million (-5% of EBITDA). Cash taxes consumed -$8.3 million (-2% of EBITDA). Re-investment in the business amounted to -$525.9 million (-156% of EBITDA). On a net basis, debt investors furnished +$394.0 million (+117% of EBITDA) while equity investors withdrew -$223.5 million (-66% of EBITDA).
out_cflow.1#01580.jpg

Barnes’ Non-operating Income, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by stability for the Barnes Group Inc Peer Group as well. In most years, Barnes was in the third quartile and top quartile. Currently, Barnes is substantially below median at -5% of EBITDA (-$17.9 million).

Barnes’ Cash Taxes, %EBITDA has experienced a downtrend over the period. This downtrend was accompanied by stability for the Barnes Group Inc Peer Group. In most years, Barnes was in the top quartile and second quartile. Currently, Barnes is upper quartile at -2% of EBITDA (-$8.3 million).

Barnes’ Business Re-investment, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Barnes Group Inc Peer Group. (Since 2014 Business Re-investment, %EBITDA has accelerated very sharply.) In most years, Barnes was in the lower quartile and top quartile. Currently, Barnes is lower quartile at -156% of EBITDA (-$525.9 million).

Barnes’ Debt Investors, %EBITDA has experienced a volatile overall uptrend over the period. This improvement was accompanied by stability for the Barnes Group Inc Peer Group. (Since 2016 Debt Investors, %EBITDA has accelerated very sharply.) In most years, Barnes was in the third quartile and top quartile. Currently, Barnes is upper quartile at +117% of EBITDA (+$394.0 million).

Barnes’ Equity Investors, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Barnes Group Inc Peer Group. In most years, Barnes was in the third quartile and top quartile. Currently, Barnes is lower quartile at -66% of EBITDA (-$223.5 million).

Barnes’ Change in Cash, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by a downtrend for the Barnes Group Inc Peer Group. In most years, Barnes was in the third quartile and top quartile. Currently, Barnes is substantially below median at -13% of EBITDA (-$44.6 million).
out_cflow.2#01580.jpg

Barnes’ Cash, %Revenue has exhibited a very small overall uptrend over the period. This improvement was accompanied by an opposite trend for the Barnes Group Inc Peer Group. In most years, Barnes was in the lower quartile. Currently, Barnes is at the lower quartile at +7%.

PROFITABILITY

Barnes Group’s return on equity reached a new post-2009 high in 2018.
This was due to very strong positive trend in pretax operating return offset by strong negative trend in non-operating factors.
The productivity of Barnes Group’s assets declined over the full period 2009-2019: asset turnover has suffered a strong overall downtrend even as it recently stabilized from the 2013 level.
More than offsetting this trend, however, pretax margin enjoyed a very strong overall uptrend although it recently stabilized from the 2014 level.
Non-operating factors (income taxes and financial leverage) had a significant negative influence on return on equity.
out_dpgrfs3#01580.jpg

Barnes Group’s return on equity is above median (12.9%) for the four quarters ended September, 2019.
out_dpgrfs3.2#01580.jpg
Operating performance (pretax return on assets) is at the lower quartile (7.3%) reflecting asset turnover that is at the lower quartile (0.55X) and pretax margin at the upper quartile (13.2%).
Tax “keep” rate (income tax management) is at median (78.7%) resulting in after tax return on assets that is at the lower quartile.
Financial leverage (leverage) is at the upper quartile (2.24X).

GROWTH RATES

Overall, Barnes Group’s growth rate has slowed considerably in recent years.
Barnes Group’s historical income statement growth has been in line with balance sheet growth. Revenue growth has paralleled asset growth; earnings growth has paralleled equity growth.

Annual revenue growth has been 3.9% per year.

Total asset growth has been 8.1% per year.

Annual E.P.S. growth has been 11.7% per year.

Equity growth has been 7.5% per year. (More recently it has been 2.4%.)

Barnes Group’s consensus growth rate forecast (average of Wall Street analysts) is 11.0% — above the average of the historical growth measures.
out_growthgrf#01580.jpg

Relative to the Barnes Group Inc Peer Group, Barnes’ historical growth measures are erratic. E.P.S. growth (11.7%) has been at the upper quartile. Total asset growth (8.1%) has been at median. Revenue growth (3.9%) has been at median. Equity growth (7.5%) has been slightly below median.

Consensus growth forecast (11.0%) is at median.
out_growthgrf.2#01580.jpg

PRICE HISTORY

Over the full time period, Barnes Group’s stock price performance has been variable and quite good. Between January, 2009 and November, 2019, Barnes Group’s stock price rose +435%; relative to the market, this was a +43% gain. Significant price move during the period: 1) April, 2016 – September, 2017: +117%.
out_price#01580.jpg

TOTAL INVESTMENT RETURNS

Current annual total return performance of 4.5% is below median relative to the S&P 500 Composite.
In addition to being below median relative to S&P 500 Composite, current annual total return performance through October, 2019 of 4.5% is slightly below median relative to Barnes Group Inc Peer Group.

Current 5-year total return performance of 11.1% is slightly above median relative to the S&P 500 Composite.
Through October, 2019, with slightly above median current 5-year total return of 11.1% relative to S&P 500 Composite, Barnes’ total return performance is above median relative to Barnes Group Inc Peer Group.
out_quartret#01580.jpg

VALUATION BENCHMARKS

Relative to S&P 500 Composite, B’s overall valuation is low. The highest factor, the ratio of enterprise value/earnings before interest and taxes, is at median. Ratio of enterprise value/assets is slightly below median. Price/earnings ratio is slightly below median. Price/equity ratio is below median. The lowest factor, the ratio of enterprise value/revenue, is below median.

Relative to Barnes Group Inc Peer Group, B’s overall valuation is normal. The highest factor, the ratio of enterprise value/revenue, is near the upper quartile. Ratio of enterprise value/earnings before interest and taxes is above median. Price/equity ratio is at median. Price/earnings ratio is at median. The lowest factor, the ratio of enterprise value/assets, is at median.
out_tradv#01580.jpg

Barnes has a very large value gap compared to the median. For B to achieve median valuation, its current ratio of enterprise value/revenue would have to fall from the current level of 2.59X to 2.11X. If B’s ratio of enterprise value/revenue were to fall to 2.11X, its stock price would be lower by $-14 to $46.
For B to achieve upper quartile valuation relative to the Barnes Group Inc Peer Group, its current ratio of enterprise value/revenue would have to rise from the current level of 2.59X to 2.66X. If B’s ratio of enterprise value/revenue were to rise to 2.66X, its stock price would increase by $2 from the current level of $60.

VALUE TARGETS

B is expected to continue to be a Value Builder reflecting capital returns that are forecasted to be above the cost of capital.
Barnes Group’s current Price Target of $65 represents a +8% change from the current price of $60.45.
This neutral appreciation potential results in an appreciation score of 46 (54% of the universe has greater appreciation potential.)
Reinforcing this neutral Appreciation Score of 46, the neutral Power Rating of 42 contributes to an Value Trend Rating of D.
out_vc#01580.jpg

Barnes Group’s current Price Target is $65 (+5% from the 2018 Target of $62 and +8% from the 11/11/19 price of $60.45). This plateau in the Target is the result of a +12% increase in the equity base and a -6% decrease in the price/equity multiple. The forecasted decline in return on equity has a large negative impact on the price/equity multiple and the forecasted increase in cost of equity has a slight negative impact as well. Partially offsetting these Drivers, the forecasted increase in growth has a large positive impact.
out_wc.1#01580.jpg
out_wc.2#01580.jpg

PTR’s return on equity forecast is 13.1% — in line with our recent forecasts. Forecasted return on equity exhibited a modest, erratic increase between 2010 and 2018. The current forecast is above the 2010 low of 10%.

PTR’s growth forecast is 8.0% — slightly above our recent forecasts. Forecasted growth enjoyed a dramatic, erratic increase between 2010 and 2018. The current forecast is well above the 2012 low of 2%.

PTR’s cost of equity forecast is 8.3% — in line with recent levels. Forecasted cost of equity suffered a dramatic, steady increase between 2010 and 2018. The current forecast is above the 2010 low of 6.1%.
out_vc.2#01580.jpg
At Barnes Group’s current price of $60.45, investors are placing a positive value of $15 on its future investments. This view is consistent with the company’s most recent performance that reflected a growth rate of 5.0% per year, and a return on equity of 14.2% versus a cost of equity of 7.8%.
PTR’s 2020 Price Target of $65 is based on these forecasts and reflects an estimated value of existing assets of $44 and a value of future investments of $21.

About John Lafferty 54938 Articles
During his career, John has developed valuation and stock rating methodologies, managed institutional portfolios and mutual funds, and provided equity research to institutional investors on thousands of companies. He has been Director of Research at PTR since its inception in 2004.

Be the first to comment

Leave a Reply

Your email address will not be published.


*


This site uses Akismet to reduce spam. Learn how your comment data is processed.