Strong Demand Aids Carpenter Technology, Transportation A Woe

On Jun 19, we issued an updated research report on Carpenter Technology Corporation (NYSE:CRS) . Efforts to strengthen customer relationships, continued execution of its commercial strategy, and acquisitions will aid the company’s growth. Strong demand across most of its end markets, barring transportation, bode well.

Upbeat Q3 Earnings, Poised for Improved Q4

Carpenter Technology delivered adjusted earnings of 87 cents per share in the third quarter of fiscal 2019 (ended Mar 31, 2019), higher than the year-ago quarter’s 60 cents per share. Strong operational performance and healthy demand across key end-use markets led to the improvement in the quarterly results.

Notably, the company has delivered nine consecutive quarters of year over growth in both its top and bottom line. Further, in the third quarter of fiscal 2019, backlog rose 9% sequentially and 44% year over year — representing the 11th consecutive quarter of sequential backlog growth.

For the Specialty Alloys Operations (SAO) segment, the company expects continued positive demand across most end-use markets for fourth quarter of fiscal 2019. Operating income is expected to increase 5-10% sequentially, after adjusting for insurance recovery.

For the Performance Engineered Products (PEP) segment, the company anticipates continued demand for titanium products to drive revenues in the fourth quarter of fiscal 2019. Operating income is expected to remain flat sequentially after adjusting for insurance benefit. The company also plans to make continued investments in additive manufacturing.

End Markets Remain Strong, Transportation Ails

Sales to the Aerospace and Defense end-use market continues to be robust, reflecting the impact of a strong product mix for materials utilized in aerospace engine applications and strong demand for defense applications driven by specific programs. The Medical end-use market continues to grow through expanded relationships with leading industry OEMs which increasingly recognize the value of the company’s high-end solutions.

Strong market conditions within the orthopedic and cardiology sub-markets will continue to bolster sales. The company intends to increase titanium capacity, backed by planned expansion of Dynamet business unit within the next fiscal year. Sales to the Energy end-use market has also been increasing on the back of oil and gas sub-market expansion and improved demand for power generation applications.

However, transportation end-use market sales have been affected by weaker demand for the company’s applications, of late. This can be attributed to trade actions and tariffs which have impacted customer order patterns. Further, a weak global light vehicle market is negatively impacting sales.

Commercial Strategy & Acquisitions: Other Catalysts

Carpenter Technology remains focused on continued execution of its commercial strategy. Through the ongoing implementation of the Carpenter Operating Model, the company has unlocked incremental capacity via efficiency and productivity improvements.

The company also increased focus and investment in targeted growth areas such as additive manufacturing and soft magnetics. The investment in the soft magnetics portfolio remains on track with $100 million investment in precision strip hot rolling mill.

There exists steady growth potential for solutions in this market given its auxiliary power unit application leadership and expected impact of electrification in the global transportation industry. Carpenter Technology will continue to grow from its acquisitions which include LPW Technology Ltd., CalRAM, and Puris LLC.

Near-Term Challenge in the PEP Segment

The PEP segment’s results in the third quarter of fiscal 2019 were below expectations owing to the underperformance of the Amega West business unit. Results of Amega West were impacted by challenges associated with lower-than-anticipated rentals for certain new tools that have been introduced recently.

Price Performance

Year-to-date, Carpenter Technology’s shares have gained 29.1%, outperforming the industry’s growth of 19.7%.

Zacks Rank & Stocks to Consider

Carpenter Technology currently carries a Zacks Rank #3 (Hold).

A few better-ranked stocks in the Basic Materials space are Materion Corp. (NYSE:MTRN) , Flexible Solutions International Inc. (NYSE:FSI) and AngloGold Ashanti Limited (NYSE:AU) , all currently sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Materion has an expected earnings growth rate of 27.3% for 2019. The company’s shares have gained 17.7% in the past year.

Flexible Solutions has a projected earnings growth rate of 342.9% for the current year. The company’s shares have soared 181.7% in a year’s time.

AngloGold has an estimated earnings growth rate of 90.6% for the ongoing year. Its shares have surged 95% in the past year.

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