Why Is Barnes Group (B) Down 50.6% Since Last Earnings Report?

It has been about a month since the last earnings report for Barnes Group (B). Shares have lost about 50.6% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Barnes Group due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Barnes Earnings Surpass Estimates in Q4, Sales Miss

Barnes Group reported better-than-expected results for fourth-quarter 2019. Its earnings surpassed estimates by 8.9%. This was its third consecutive quarter of impressive results.

The company’s adjusted earnings in the reported quarter were 86 cents per share. This surpassed the Zacks Consensus Estimate of 79 cents. Also, the bottom line increased 2.4% from the year-ago quarter figure of 84 cents, benefiting largely from improved operating results.

For 2019, the company’s adjusted earnings were $3.21 per share, within its guidance of $3.18-$3.23. However, the bottom-line results reflected a decline of 0.3% from the year-ago figure of $3.22 and lagged the Zacks Consensus Estimate of $3.38.

Top-Line Results

In the reported quarter, Barnes’ net sales decreased 3.6% year over year to $370.2 million. Organic sales in the quarter declined 4% year over year and forex woes had an adverse impact of 1%. However, acquisitions contributed 1% to sales growth.

The company’s revenues lagged the Zacks Consensus Estimate of $374.5 million by 1.2%.

Barnes reports revenues under two heads — Industrial and Aerospace. A brief snapshot of the segmental sales is provided below:

Revenues generated from Industrial amounted to $230.9 million, declining 9.5% year over year. The segment suffered from trade uncertainties and weakness in industrial manufacturing across the globe. Organic sales were down 10% year over year, while forex woes had an adverse impact of 1%. Buyouts had a positive impact of 2%.

Aerospace’s sales were $139.3 million in the fourth quarter, up 7.9% from the last reported quarter. Aftermarket revenues were driven by growth in spare parts as well as maintenance, repair and overhaul sales. Meanwhile, new engine programs boosted aerospace original equipment manufacturing revenues.

For 2019, the company’s net sales were $1.49 billion, reflecting a marginal decline of 0.3% from the previous year. Also, the top line lagged the Zacks Consensus Estimate of $1.51 billion.

Margin Profile

In the reported quarter, Barnes’ cost of sales decreased 10% year over year to $226.8 million. Notably, cost of sales represented 61.3% of net sales versus 65.6% in the year-ago quarter. Selling and administrative expenses increased 2.6% year over year to $82.1 million, and represented 22.2% of net sales.

Adjusted operating income in the quarter increased 8.4% year over year to $63.5 million, while margin expanded 190 basis points to 17.2%. Interest expenses totaled $4.8 million in the reported quarter.

Balance Sheet & Cash Flow

Exiting the fourth quarter, Barnes’ cash and cash equivalents were $93.8 million, up 16.6% from $80.5 million recorded in the last reported quarter. Long-term debt was $825 million, reflecting a 3.6% decline from $856.1 million in the last reported quarter. During 2019, the company repaid long-term debt of $341.4 million.

In 2019, it generated net cash of $248.3 million from operating activities, up 4.7% from the previous year. Capital expenditure totaled $53.2 million, decreasing 7% year over year. Free cash flow was $195 million versus $179.9 million in 2018.

During the year, Barnes paid out dividends amounting to $32.5 million, representing a 1% increase over the previous year’s disbursement. Also, shares worth $50.3 million were repurchased in the year.

Outlook

For 2020, Barnes anticipates adjusted earnings of $3.12-$3.32 per share, suggesting a decline of 3% to growth of 3% from 2019 adjusted figure.

Total revenues are predicted to decline modestly from the previous year. While organic sales are predicted to increase 1-3% in the year, divestment of the Seeger business will likely have an adverse impact of 4%. Forex impact will probably be neutral on sales.

Operating margin is predicted to be 16-17% in the year. Effective tax rate will likely be 24-24.5%, while capital expenditure will probably total $60 million. The divestiture of the Seeger business will likely have an impact of 10 cents per share on earnings in 2020.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates review. The consensus estimate has shifted -17.41% due to these changes.

VGM Scores

At this time, Barnes Group has a nice Growth Score of B, though it is lagging a bit on the Momentum Score front with a C. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Barnes Group has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.