Barnes: Cash, Goodwill, And Investing In Growing Target Markets

Summary

Barnes offers differentiated industrial technologies and specialized products and services for clients in different sectors.

Management has accumulated a significant amount of know-how, which serves as a competitive advantage over new entrants.

Barnes expects to target corporate digitalization, smart connected products, electrification of vehicles as well as other growing markets.

If more control over the organization helps the company maintain or increase FCF margins, fair valuation will most likely grow with the passage of time.

choness/iStock via Getty Images Barnes Group ( B ) owns a lot of know-how after operating for more than 87 years. Besides, if management is successful in investing in smart connected products, digitalization, and the electric vehicle industry, revenue would trend north. Finally, I expect significant operating synergies from accumulated goodwill and inorganic growth announced in the last annual report. Yes, I also see risks from fixed-price contracts signed with large clients. However, I believe that the current price fails to represent future free cash flow. Barnes Group

Engineering group Barnes offers differentiated industrial technologies and specialized products and services for clients in different sectors.

Management claims to have relationships with large players in the aerospace, transportation, manufacturing, automation, healthcare, and packaging industries: Barnes Group Inc. – Events & Presentations Currently operating under two business segments, Industrial and Aerospace, we are talking about a group founded in 1857 with presence in America, Europe, and Asia. In my opinion, after so many years in business, management has accumulated a significant amount of know-how, which serves as a competitive advantage over new entrants: Barnes Group Inc. – Events And Presentations Management also appears to be entering or investing more in markets that are expected to grow significantly. According to a recent presentation to investors, Barnes expects to target corporate digitalization, smart connected products, electrification of vehicles as well as other growing markets. As a result, I would be expecting revenue growth to increase in the coming years: Barnes Group Inc. – Events And Presentations Beneficial Guidance, Growing EBITDA Margin, And Optimistic Estimates From Investment Analysts

I studied both the guidance given by management and estimates given by investment analysts. In the last presentation given to investors, Barnes noted sales growth between 8% and 10% , adjusted operating margin of 13%-14%. I will show later that the current stock price does not represent the estimates given by management: Barnes Group Inc. – Events And Presentations Barnes Group Inc. – Events And Presentations Expectations from investment analysts include sales growth of 8% in 2022, and 7% in 2023. 2023 sales would be equal to $1.46 billion. The company’s 2023 EBITDA would be equal to almost 21%, so 2023 EBITDA would equal $300 million. Finally, investors are also expecting positive net income from 2022 to 2023. Best Case Scenario: The BES Operating System Is Successful, The Company Generates More Patents, And We See More Inorganic Growth

I am quite optimistic about the company’s BES operating system, which allows management to supervise everything that employees do. In my view, if more control over the organization helps the company maintain or increase FCF margins, fair valuation will most likely grow with the passage of time: BES is our integrated operating system that promotes a culture of employee engagement and empowerment and drives alignment across the organization around a common vision. Source: 10-K In addition, under this case scenario, I expect that Barnes will acquire or generate new intellectual property like patents or know-how. If new ideas lead to more economies of scale as management promised in the last annual report, both free cash flow and revenue will most likely grow: Driven by a passion for innovation, we embrace intellectual property as a core differentiator to create proprietary products, processes and systems. We foster an environment that generates great ideas and shares best practices to maximize our collective strengths and create economies of scale in the development and commercialization of new and innovative products and services. Source: 10-K In the past, Barnes did prove that it is ready to acquire other partners, so under this case scenario, I expect more inorganic growth. Let’s note that management promised more strategic acquisitions in the past. With more M&A, I would be expecting FCF growth: The successful execution of this strategy requires making value-enhancing investments in organic growth (new products, processes, systems, services, markets and customers) and strategic acquisitions while divesting of businesses or existing product lines to effectively redeploy capital. Source: 10-K From 2022 to 2025, I assumed net sales growth of 8.3%, so […]

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