Is Barnes Group Stock A Good Bet At $50?

We think Barnes Group stock (NYSE: B) may not be a good investment option right now. Barnes Group B is a provider of highly engineered products, differentiated industrial technologies, and innovative solutions, mainly to the aerospace, transportation, manufacturing, automation, healthcare, and packaging industries. B stock trades at little over $50 currently and is, in fact, down 18% since the beginning of 2020. It traded at $65 in February 2020 – just before the outbreak of the coronavirus pandemic – and is currently 22% below that level, as well. B stock has recovered 47% from its March 2020 low, compared to an 87% rise in the S&P 500 during the same time. The stock has underperformed the market in the last one year as its primary end markets – aerospace, automobile, etc. – were the most affected during the pandemic. Aircraft utilization is still low and certain airlines have reduced the number of aircraft in service. Though the lifting of lockdowns over recent months and vaccine rollout has enthused the stock markets, there is still uncertainty around the timing of full recovery in aerospace and transportation. The recent surge in Covid cases has only exacerbated this uncertainty, due to which we believe that Barnes Group stock is unlikely to see a full recovery to its pre-Covid levels anytime soon. In the absence of a complete lockdown (like the one seen in 2020) and continued economic stimulus measures, B stock has the potential to see a 10% rise in the near term. Our conclusion is based on our comparative analysis of Barnes Group stock performance during the current crisis with that during the 2008 recession in our interactive dashboard.

2020 Coronavirus Crisis

Timeline of 2020 Crisis So Far:

• 12/12/2019: Coronavirus cases first reported in China
• 1/31/2020: WHO declares a global health emergency.
• 2/19/2020: Signs of effective containment in China and hopes of monetary easing by major central banks helps S&P 500 reach a record high
• 3/23/2020: S&P 500 drops 34% from the peak level seen on Feb 19, 2020, as COVID-19 cases accelerate outside China. Doesn’t help that oil prices crash in mid-March amid Saudi-led price war
• Since 3/24/2020: S&P 500 recovers 87% from the lows seen on Mar 23, 2020, as the Fed’s multi-billion dollar stimulus package suppresses near-term survival anxiety and infuses liquidity into the system.

In contrast, here is how B stock and the broader market fared during the 2007-08 crisis.

Timeline of 2007-08 Crisis

• 10/1/2007: Approximate pre-crisis peak in S&P 500 index
• 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
• 3/1/2009: Approximate bottoming out of S&P 500 index
• 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)

B and S&P 500 Performance Over 2007-08 Financial Crisis

B stock dropped from levels of over $32 in September 2007 (pre-crisis peak) to levels of $9 in March 2009 (as the markets bottomed out), implying B stock lost more than 70% from its approximate pre-crisis peak. It recovered post the 2008 crisis, to levels of close to $17 in early 2010, rising by more than 80% between March 2009 and January 2010. In comparison, the S&P 500 Index saw a decline of 51% and recovered 48%.

B Fundamentals Over Recent Years

Barnes Group’s revenues dropped from $1.5 billion in 2018 to $1.1 billion in 2020 due to slowdown in both – aerospace and industrials – segments of the company on account of the pandemic. Along with lower revenue, margins have also decreased sharply over recent years. EPS has gone down from $3.18 in 2018 to $1.24 in the last twelve months. EPS in 2020 was also affected by higher cost of sales and SG&A expense.

Does B Have Enough Cash Cushion To Meet Its Obligations Through The Coronavirus Crisis?

Barnes Group’s debt decreased from $944 million in 2018 to $704 million in 2020. During the same time, its total cash also went down from $101 million to $79 million. But B has been generating stable and healthy cash from operations over the last few years, with the metric standing at $215 million in 2020. The fact that the company has lower debt burden and almost stable cash generation capacity will help it tide over the current crisis.

Conclusion

Phases of Covid-19 Crisis:

• Early- to mid-March 2020: Fear of the coronavirus outbreak spreading rapidly translates into reality, with the number of cases accelerating globally
• Late-March 2020 onward: Social distancing measures + lockdowns
• April 2020: Fed stimulus suppresses near-term survival anxiety
• May-June 2020: Recovery of demand, with gradual lifting of lockdowns – no panic anymore despite a steady increase in the number of cases
• Since late 2020: Weak quarterly results, but continued improvement in demand and progress with vaccine development buoy market sentiment

Despite the recent surge in the number of new Covid-19 cases in the U.S., we expect continued improvement in demand to buoy market expectations. As investors focus their attention on expected 2021 results, we believe Barnes Group stock has the potential for modest gains once fears surrounding the Covid outbreak are put to rest. Barnes Group stock has the potential to gain 10% in the near term, with stronger gains possible only once the timing of recovery in its end markets becomes clearer.

Want upside from growing digitization post Covid-19, but don’t want to pay a big premium for tech stocks? Check out our theme on Value Tech Stocks

See all Trefis Price Estimates and Download Trefis Data here

What’s behind Trefis? See How It’s Powering New Collaboration and What-Ifs For CFOs and Finance Teams | Product, R&D, and Marketing Teams