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Wednesday, 9 May 2007
Barnes Group (B) "Revisiting a Stock Pick"

Hello Friends!  Thanks so much for stopping by and visiting my blog, Stock Picks Bob's Advice!  As always, please remember that I am an amateur investor so please remember to consult with your professional investment advisers prior to making any investment decisions based on information on this website.

I really do intend to cut back on the posting around here for a couple of weeks...at least that is the plan :).  But before I get to cutting back, I did want to write up this stock that made the list of top % gainers on the NYSE, Barnes Group (B), which actually was #1 on the list closing at  $28.61, up $3.81 or 15.36% on the day.  I do not own any shares (I actually have owned shares in my trading account in the past), nor do I have any options on this stock.  But I still like this stock and that is why I think

BARNES GROUP (B) IS RATED A BUY

Let me go over a few of the things that after reviewing the stock I believe that this company deserves a spot on my blog.

I first wrote up Barnes Group (B) on February 16,  2006, when the stock was trading at $39.11/share.   Barnes split 2:1 on June 12, 2006, making my effective pick price actually $19.56.  With the stock closing today at $28.61, this represents a gain of $9.05 or 46.3% since posting a little over a year ago.

What exactly does this company do?

According to the Yahoo "Profile" on Barnes, the company

"...engages in the manufacture and distribution of aerospace and industrial products worldwide. It operates in three segments: Barnes Distribution, Associated Spring, and Barnes Aerospace."

How did the company do in the latest quarter?

It was the announcement of 1st quarter 2007 results this morning prior to the start of trading that drove the stock higher this morning. Sales for the quarter came in at $360.7 million, up 20% from $299.9 million in the first quarter of 2006.  Net income climbed 50% to $27.7 million or $.50/diluted share, compared to $18.5 million or $.36/diluted share last year.  

The company beat expectations of $.40/share and also raised guidance for the full fiscal year to a new range of $1.74 to $1.83/share, from the previously announced range of $1.53 to $1.60/share.  It is what I call the "trifecta-plus" when a company comes in with a great earnings report that beats expectations and they go ahead and raise guidance on future earnings; the street liked the announcement and bid up the price of Barnes Group accordingly.

How about longer-term results?

Reviewing the Morningstar.com "5-Yr Restated" financials on B, we can see that revenue has steadily increased from $784 million in 2002 to $1.26 billion in 2006.  Earnings have increased steadily, except for a slight dip between 2003 and 2004 when earnings dropped from $.66/share to $.63/share, from $.58/share in 2002 to $1.39/share in 2006.

The company also pays a dividend and has raised it several times from $.40/share declared in 2002 to $.42/share in 2005 and $.49/share in 2006.  The company has increased the share float from 37 million in 2002 to 51 million in 2006 and 53 million in the trailing twelve months (TTM).  This 43% increase in outstanding shares was accompanied by a 79% increase in revenue and a 140% increase in earnings.  So while I do believe that this share issuance was a bit dilutive, the company was able to successfully manage the new shares growing faster in both revenue and earnings than outstanding shares.

The company is free cash-flow positive and growing it with $24 million in free cash in 2004, increasing to $44 million in 2005 and $73 million in 2006.

The balance sheet is solid with $35.4 million in cash reported along with $425.9 million in other current assets.  This total of $461.3 million in total current assets, easily covers the $295.1 million in current liabilities yielding a current ratio of 1.56.

What about some valuation numbers on this stock?

Checking Yahoo "Key Statistics" on Barnes (B), we find that the company is a mid cap stock with a market capitalization of $1.51 billion.  The trailing p/e is a moderate 20.51, with an even nicer forward p/e (fye 31-Dec-08) estimated at 15.63.  The PEG is a very reasonable (5 yr expected) 1.03.

Using the Fidelity.com eresearch website, we can see that the Price/Sales (TTM) also suggests reasonable valuation with a ratio of 1.01 for Barnes, compared to the industry average of 1.41.  However, according to Fidelity, the Return on Equity (TTM) for Barnes is a bit low at 15.25% compared to the industry average of 23.44%.

Finishing up with Yahoo, we can see that there are 52.62 million shares outstanding with 40.12 million that float.  Of those that float, 4.44 million were out short as of April 10, 2007, representing 9.6% of the float or 17.6 trading days of volume.  This is very significant from my perspective as I use a "3 day rule" to determine significant short interest.  That is if it would take more than 3 days of average volume to cover the shares already sold short by speculators, I believe the setting is ripe for a 'squeeze' of the shorts.  And in this particular case, there are (as of 4/10/07) actually 17.6 trading days of volume.  I suspect lots of short-sellers were scrambline to buy today as the stock had a volume of 3.7 million shares traded today, almost 9 times the average trading volume of 441,447 shares.

Yahoo reports that the company pays a forward dividend of $.56/share yielding 2.3%.  The last stock split was the 2:1 split I discussed above which occurred on June 12, 2006

What about the chart?

Reviewing a "Point & Figure" Chart on Barnes Group (B) from StockCharts.com, we can see that this stock has been a bit volatile, but recently bounced off the support line at around $15.5 in July, 2006, and has since moved almost straigt higher to the current level of around $29.00.

Summary: What do I think?

Well, needless to say, I like this stock a lot.  In fact, I even owned shares for awhile, which goes to show you that I am indeed willing to re-examine past stock selections even if I end up getting stopped out and selling shares.  Unfortunately, I am currently at my maximum holdings (20) because with the selling of a portion of my Precision Castparts, this would have 'entitled' me to add a new position to my holdings.  But since I am at 20....well I guess I shall not be doing anything.

The company reported a great quarter today.  They beat expectations and raised guidance.  They have been doing this steadily for the past five years and also have been increasing their dividend.  They have increased the float modestly but revenue and earnings have grown quicker.  Free cash flow is positive and growing and the balance sheet appears solid.

Valuation-wise the p/e is moderate and the PEG is just over 1.0.  The Price/Sales is nice but the Return on Equity was a bit anemic.  Finally, there are LOTS of shares out short probably providing a good floor to the stock price as the short-sellers scramble to cover.  Finally the chart looks nice!

Thanks again for stopping by and visiting.  If you would like to comment, please feel free to do so on the blog or email me at bobsadviceforstocks@lycos.com.  If you get a chance, be sure and visit my Stock Picks Podcast Website.

Bob


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