Barnes Group might manufacture profits

By Lauren Rudd

Financial instruments will always fluctuate in price and, at times, those fluctuations can be dramatic. It is the nature of the beast. When you add in the recently accentuated levels of uncertainty and concern, it is no wonder that market levels have been the dominate investment theme of late.

Moreover, Wall Street is inherently forward-looking. Therefore, anticipation rather than actuality is often the driving force behind investor sentiment and, subsequently, share prices. I mention this only because we are again entering another earnings season and the anticipation for increased earnings is high. At the same time, investors are bracing for the Fed to raise interest rates by the end of the year.

As always, there will be a degree hand wringing and finger pointing. Some companies with a less-than-stellar performance will use the recent hurricanes and what was perceived to be a degree of indecision on the part of the Federal Reserve as easy scapegoats.

Certainly, those circumstances have and will continue to play a role going forward. But their significance is questionable. At the same time, never rule out factors such as inept management or a weak product line. The good news is that the potentially grim reports are ancient history. Everything in the earnings announcements is, as they say, in the past tense.

It is what you can expect from a company going forward that counts. Companies often waffle and dance around the issue of what the future holds, but that is where you should concentrate your research.

So, as you gaze across that dark abyss we call the future let me once again offer a few words of encouragement. The apocalypse is not upon us. Just the opposite is true. Although it would be premature to forecast an audacious outlook, it appears that the economy will chalk up a more than reasonable overall performance for 2017.

So now the question is, given Wall Street’s cornucopia of investment opportunities, where do you start? You might want to begin your research with the Barnes Group (B). Founded in 1857, Barnes operates as both an industrial and aerospace manufacturer and service provider.

The company operates two segments, Industrial and Aerospace. The Industrial segment offers precision parts, products, and systems. The Aerospace segment produces precision-machined and fabricated components and assemblies for original equipment manufacturer turbine engine, airframe and industrial gas turbine builders.

When I wrote about the company a year ago, my 2016 earnings estimate was $2.51 per share, with a 12-month share price projection of $43. So how did the company do? The shares recently closed at $71.83, and the company posted earnings of $2.83 per share.

Sales for the second quarter of 2017 were $364 million, up 19 percent from the prior-year period. The increase was driven by strong organic sales growth of 11 percent and acquisition sales of 8 percent. The company’s operating margin for the quarter was 15.7 percent, with earnings per share of $0.82, up 34 percent.

Barnes has 2.3 times more current assets than current liabilities and 2.3 times more assets than long-term liabilities. So the company can easily handle both short-term and long-term debt obligations.

Shareholder equity increased 11 percent, to $1.3 billion, at the end of the second quarter. Over the same period, cash increased by 58 percent, while long-term debt increased 5.6 percent. So Barnes is wisely managing its balance sheet.

The greatest risk to Barnes is that it derives its revenue from a small number of large companies. Therefore, the loss of one or more could hurt its revenues and earnings.

Net income for the second quarter was $45.0 million, or $0.82 per share, compared with $33.2 million, or $0.61 per share, for the same period a year ago.

The intrinsic value of the shares, using a conservative model of free cash flow to the firm, is $90. My earnings estimate is $2.90 per share for this year and $3.05 for 2018, with a 12-month share-price projection of $79, for a 10 percent capital gain. There is also an indicated dividend yield of 0.80 percent.

Lauren Rudd is president of Rudd International, an asset management firm. Neither Lauren Rudd nor his employees hold any shares discussed or have plans to buy them within 30 days, nor is there any intended inducement to buy or sell any security. You can write to Lauren Rudd at Lauren.Rudd@RuddInternational.com or call him at 941-706-3449. For back columns, go to www.ruddreport.com. Lauren Rudd offers commentary Thursdays on SNN News 6 during the 5:30 p.m. live newscast.

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