Carpenter Technology Stock: Stronger Growth Suggest Higher Share Price

carpenter technology stock
iStock.com/makasana

A Specialized Metals Play That Benefits From Tariffs

The recent tariffs on steel from China, Mexico, Canada, and potentially the European Union has somewhat helped the steel industry in the U.S., although the extra costs also drive up the cost of inputs in many manufactured goods.

A mid-cap advanced metals play that looks intriguing is Carpenter Technology Corporation (NYSE:CRS). It’s a producer of advanced specialty alloys such as titanium alloys, powder metals, stainless steels, alloy steels, and tool steels.

Carpenter Technology products are of the advanced nature used in a wide range of applications, including aerospace, transportation, healthcare, and energy.

The company doesn’t only produce in the United States; it has operations in Europe and Asia as well. Therefore, the company can bypass some of the tariffs by selling to domestic markets in the regions where it produces.

Advertisement

CRS stock has outperformed the S&P 500, with a 6.6% gain this year a 37% gain over the past year.

Chart courtesy of StockCharts.com

Carpenter Technology stock is well up from its 52-week low of $54.32, with support at around $51.00-$52.00 and initial resistance at $60.00.

Why CRS Stock Could Move Higher

For Carpenter Technology Corporation to push higher, the company needs to show investors it can deliver consistent growth in revenue and earnings.

The past five years haven’t been good, with revenue contracting in three years. Carpenter Technology recorded a decline in revenue from $2.3 billion in fiscal 2013 to $1.8 billion in fiscal 2017.

Fiscal Year Revenue (Billions) Growth
2013 $2.3
2014 $2.2 -4.3%
2015 $2.2 2.3%
2016 $1.8 -18.5%
2017 $1.8 -0.9%

A positive sign is that Carpenter Technology is expected to ramp up its revenue growth rate to 17.6% (to $2.1 billion in revenue) in fiscal 2018, versus the prior 10.6% estimate.

For fiscal 2019, CRS is slated to see its revenue growth rate fall to 9.5% (to $2.3 billion in revenue), albeit it would still be well above the recent growth rates and compound annual growth rate (CAGR). (Source: “Carpenter Technology Corporation (CRS),” Yahoo! Finance, last accessed August 2, 2018.)

Carpenter Technology has positive earnings before interest, taxes, depreciation, and amortization (EBITDA) and earnings, but I would like to see some growth.

Fiscal Year EBITDA (Millions)
2013 $361.6
2014 $345.5
2015 $281.3
2016 $244.3
2017 $238.5

Generally accepted accounting principles (GAAP) diluted earnings surged by 330.4% to $0.99 per diluted share in fiscal 2017.

Fiscal Year GAAP Diluted EPS Growth
2013 $2.72
2014 $2.47 -9.2%
2015 $1.11 -55.1%
2016 $0.23 -79.3%
2017 $0.99 330.4%

On an adjusted basis, the earnings trend is positive, which could bode well for Carpenter’s stock price.

Carpenter Technology is estimated to ramp up earnings by over 100% to $2.37 per diluted share, versus $1.08 per diluted share in fiscal 2017. Moving to fiscal 2019, the company could earn as much as $4.03 per diluted share.

The company’s balance sheet has more debt versus cash than I would like to see, but Carpenter has had positive free cash flow (FCF) in the past three fiscal years.

The decline in FCF in fiscal 2017 was disappointing, but the expected increase in earnings should help drive FCF higher.

Fiscal Year Free Cash Flow (Millions) Growth
2013 $121.7
2014 $109.6 9.9%
2015 $112.1 202.3%
2016 $161.7 44.3%
2017 $30.8 -81.0%

Analyst Take

I like the expected revenue growth and strong earnings going forward for Carpenter Technology. The five-year estimated CAGR for earnings of 59.3% is encouraging.

CRS stock trades at 15.2 times its consensus for fiscal 2019 and 13.6 times its high estimate, which is attractive. The price/earnings-to-growth (PEG) ratio of 0.41 suggests a deep value situation for Carpenter Technology stock.