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Thursday, November 06, 1997

NN Ball & Roller, Inc.
(Nasdaq: NNBR)
Phone: 423-743-9151
Price (11/5/97): $8 3/4

HOW DID IT FIND TROUBLE?

Precision ball bearing manufacturer NN Ball & Roller found trouble the old-fashioned way. The company made less money.

NN Ball & Roller was a hot stock through mid-1996, doubling in less than a year. Sales were growing, earnings were up, and all was well. But in the second half of 1996 the company began to show a decline in foreign sales due to weakness in European economies. In addition, near the end of 1996, two key customers announced that they were going to bring some of their bearing manufacturing "in-house." Sales and earnings began to fall and so did the stock price.

The bad news continued into 1997 with declines in sales and earnings during the first two quarters. In early September the company announced that it was going to fall short of analysts expectations for the final quarters of 1997. Analyst downgrades followed a bleak third quarter earnings report as the company's Asian business began to look suspect because of weakening economies.

BUSINESS DESCRIPTION

NN Ball & Roller manufactures high-precision balls and rollers. These balls vary in size from 3/16ths of an inch to two inches. They are used in so-called quiet bearings for hand drills, water pumps, drive axles and oil drilling equipment. The company has a 7% market share worldwide.

NN Ball & Roller uses 52100 grade stainless steel to manufacture its balls. This steel is produced primarily overseas as no U.S. steel manufacturer produces this grade steel in sufficient quantities. The stronger dollar should make raw materials prices more affordable for the company.

Competitors include Hoover Precision Products in the U.S. and Amatsuji Steel Ball Manufacturing Co. and SKF Bearing Industries internationally.

FINANCIAL FACTS

Income Statement
12-month sales: $77.6 million
12-month income: $9.2 million
12-month EPS: $0.62
Profit Margin: 11.9%
Market Cap: $129.5 million

Balance Sheet*
Cash: $2.8 million
Current Assets: $28.1 million
Current Liabilities: $7.9 million
Long-term Debt: N/A
(*As of June 30, 1997)

Ratios
Price-to-earnings: 14.1
Price-to-sales: 1.7

HOW COULD YOU HAVE SEEN IT COMING?

Once the company began to miss estimates in 1996, the picture became cloudy. It has never really cleared up. Analysts have consistently been dropping estimates. The company has provided guidance in their SEC filings that foreign business conditions are not favorable and that they have not picked up business to offset the loss of key customers.

This trouble was avoidable by doing diligent research. There is no way to have expected great things from the stock given the statements made by the company and the persistent decline in earnings.

WHERE TO FROM HERE?

NN Ball & Roller seems to be a good company that makes a very good product. However, it is in a cyclical business that, at this point, is on the downside of the curve. The company has already warned of trouble ahead in the fourth quarter.

Analysts anticipate that the company will turn things around in 1998 with EPS estimates of 0.67 for the year. Long-term growth is projected at an average of 17%, but the range of estimates is between 10% and 22%. The worldwide industry growth is 5%.

Looking at these estimates, fair value for the stock ranges from $6 3/4 to $14 3/4 depending on which long-term growth rate you use. However, if the company only grows at the rate of the rest of its industry, the price could drop as low as $3 and change.

The bottom line here is that the company needs to begin to show some positive earnings comparisons. That looks to be at least a couple of quarters away. Near the end of this year, after tax-loss selling takes its toll, the stock might be worth a look. The 3.2% dividend looks safe and could help an investor wait for a turnaround.

- Mark Weaver, MD, MWEAV@aol.com


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