Insights

Why Shares of Barnes Group Slumped Today

What happened

Shares in engineering products company Barnes Group (NYSE: B) fell more than 8% by midday today. The move comes after a disappointing set of second-quarter earnings. Barnes sells into two main end markets: industrial (healthcare, automation, mobility, packaging, and advanced packaging) and aerospace (commercial and military). 

In a common refrain during this earnings season, it’s a story of aerospace being good (sales up 26% in the quarter), and broader industrial markets being weaker (sales down 10% in the quarter). Unfortunately, the improving outlook in aerospace isn’t enough to fully offset the deterioration on the industrial side. As such, management cut its full-year guidance. 

Full-year organic sales growth guidance is 5% to 6%, compared to prior guidance of 8% to 10%.
Full-year adjusted operating margin of 11% to 12%, compared to prior guidance of 12.5% to 13.5%.
Full-year adjusted earnings per share of $1.90 to $2.05, compared to prior guidance of $2.20 to $2.40.

Management attributed the guidance cut to weaker Industrial performance and macroeconomic headwinds. In response to worsening conditions, CEO Thomas Hook said “we have commenced a systematic multiphased initiative to significantly reduce costs and integrate our operations.”

So what

In a sign of what’s to come in the industrial sector, Barnes Group cut its capital expenditure plans for 2022 from a range of $50 million to $55 million to a new range of $40 million to $45 million. But one person’s capital expenditure is another person’s revenue. So the weakening in its end markets, if replicated across the board, will feed through the sector. 

On the other hand, aerospace remains a bright spot in the industrial sector, and leading names like General Electric and Raytheon Technologies have reported excellent results in their commercial aerospace operations.

Now what

Unfortunately, Barnes Group is going to have to work through what is hopefully a temporary weak patch in the industrial sector, while receiving support from its aerospace operations. Still, management is already taking action to preserve cash flow and improve operations. Meanwhile, many of the headwinds (labor shortages, weak automotive production, high raw-material inflation) could ease through 2022.

Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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