Description
Investment Thesis
We believe shares in Barnes Group Inc. (B) represent a compelling long-term investment. The company recently announced a transformative merger to enlarge its attractive aerospace division while simultaneously engaging in restructuring of its underperforming industrial segment. We think valuation is attractive when factoring in synergy targets (from the deal and restructuring) alongside the bullish outlook for aerospace end-markets.
By expanding its presence in the aerospace sector, through the MB Aerospace acquisition, the company aims to capitalize on the strong demand for aerospace components and services. At the same time, the company is addressing the challenges faced by its underperforming industrial segment through restructuring initiatives. By taking steps to optimize operations and improve efficiency, Barnes Group aims to enhance the profitability and overall performance of this segment.
In summary, the combination of the transformative merger in the aerospace division and the restructuring of the industrial segment positions Barnes Group for improved financial performance and growth prospects. We see the company trading at ~8x 2025 EBITDA and think this is too cheap against a strong demand backdrop. There have been activists involved with the company and there could be increased pressure to sell the company if valuation does not improve significantly. We have been impressed by the strategy set by Tom Hook, who was appointed CEO last year and look forward to an increased focus on capital allocation.
Company Overview:
The company operates in two segments: Industrial and Aerospace.
Industrial
The industrial segment is produces highly engineered products and systems to a diverse range of end-markets and geographies:
The Industrial segment is made up of three units after the Force & Motion Control business and the Engineered Components business were recently combined into Motion Controls Solutions.
Motion Control Solutions: The Motion Control Solutions business sells into the following end markets: General Industrial (52% of revenue), Auto Production (25% of revenue) and Tool & Die (23% of revenue).
Automation: The Automation business develops robotic grippers, end-of-arm tooling systems, and other automation components for robotic handling applications.
Molding Solutions: products serving the plastic injection molding industry. End markets include Medical, Personal Care & Packaging (45% of revenue), Auto Molding Solutions (35% of revenue), and General Industrial (20% of revenue).
The company launched a multi-phase transformation initiative for the Industrial segment in mid-2022, with a focus on improving global competitiveness, accelerating revenue growth, and achieving operational efficiencies. They have made solid progress on the previously announced phases and anticipate annual savings result in run rate savings of approximately $27 million in 2025.
Aerospace
This following breakdown is prior to the MB acquisition, which is discussed in further detail below.
MB Aerospace Acquisition
In June, Barnes announced a transformational agreement to acquire MB Aerospace, a leading provider of precision aero-engine component manufacturing and repair services, for approximately $740M. MB Aerospace serves major aerospace and defense engine OEMs, Tier 1 suppliers, and MRO providers. The acquisition is expected to close later this year. MB Aerospace is projected to generate around $330M in revenue and $65 million in EBITDA for a headline multiple of 11.4x. Identified cost synergies of $18M bring the multiple down to a multiple of 8.9x. It plans to finance the transaction with cash on hand and additional acquisition financing. Initially, the net leverage is expected to be between 3.7x and 3.9x Consolidated EBITDA, with a goal of reducing it to below 3.0x within 12 months and 2.5x within 24 months following the closing.
MB Aerospace, headquartered in the U.K., operates 10 facilities across the U.S., U.K., Poland, and Taiwan. The locations in Poland and repair service locations in Taiwan, enhancing their low-cost footprint. This expansion is crucial for providing customers with cost-competitive solutions and attracting new business. Additionally, the addition of the UK and Poland locations introduces European manufacturing capabilities and the opportunity to develop European-based repair services, filling a gap in their portfolio.
MB specializes in manufacturing fabricated assemblies, complex machined components, and component repair. It supplies over 100 aero-engine platforms and counts Pratt & Whitney, Rolls-Royce, and General Electric among its customers.
The acquisition presents a valuable opportunity for transformation, as the products and services offered by Barnes Group and MB Aerospace are well-aligned. Their capabilities complement each other, and there are promising growth prospects for the merged operations. Upon completion of the acquisition, Barnes plans to fully integrate MB Aerospace into its business, bringing diversification across the customer base, engine platforms, and geographical reach.
The revenue mix brought by MB Aerospace adds further diversification to Barnes, particularly with increased exposure to defense programs, business aviation, and helicopters. The acquisition also enhances Barnes' offerings in advanced component manufacturing and repair capabilities for hot and cold engine sections. The program overlap between Barnes and MB Aerospace is minimal, and their offerings are highly complementary. Barnes focuses on the LEAP engine, while MB Aerospace brings valuable geared turbofan content, crucial for narrow-body aircraft. In terms of legacy platforms, Barnes concentrates on CFM56, while MB Aerospace has a stronger presence in V2500. This limited overlap provides broader platform exposure throughout the life cycle.
Regarding profitability, the MB’s profile is similar to that of Barnes with high aftermarket margins. The company is focused on using the acquisition to increase OEM margins by leveraging scale, customer relationships, and supply chain opportunities.
We think the cost synergy target of $18M is conservative and think the pro-forma revenue profile is set up to ride the continued aerospace upgrade cycle.
Financials and Valuation
Due to the recent acquisition and restructuring actions, we are valuing the company on, what we see as, “clean” numbers of FY25. Using conservative forecasts for growth and synergies, we see the company generating ~$400M in EBITDA in 2025. On those numbers, we see the company trading at ~8x EBITDA and think this is too cheap for a high-quality company facing a large demand tailwind for the foreseeable future. Using a more realistic 10x multiple results in a share price of ~$58, which represents ~36% upside alongside a 1.5% dividend yield.
Major Risks
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.
Catalyst
- Upside to synergy and restructuring targets
- Increased activist pressure if valuation does not improve