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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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