Seeking Alpha: Today's Performance And Valuation Understate Carpenter's Potential

Seven months ago, I had some concerns about the near-term outlook for Carpenter Technology (NYSE:CRS), as I thought near-term weakness in oil/gas demand and recent trend of uninspiring quarterly performance would outweigh a generally positive view of improving aerospace market fundamentals. The shares are about 3% lower today than when I last wrote about Carpenter - basically matching the S&P 500 and significantly outperforming Allegheny Technologies (NYSE:ATI), Alcoa (NYSE:AA), and Universal Stainless & Alloy (NASDAQ:USAP).

The near-term outlook is still dicey. Expectations for fiscal 2016 earnings have come down a few times, but the outlook for fiscal 2017 seems to be getting better (at least from a sell-side perspective). The next few quarters are likely to see revenue contraction due to weakness in energy and industrial demand, but I believe Carpenter can still leverage its specialty alloy expertise to generate long-term revenue growth in the mid-single digits. Given the prospects for growth in aerospace and an eventual recovery in energy, coupled with some scarcity value, I think the company is looking more interesting for investors who can afford to be early to the story.

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Today's Performance And Valuation Understate Carpenter's Potential

Seeking Alpha: Carpenter Technology Ready For Demand And Free Cash Flow Growth

Carpenter Technology (NYSE:CRS) has done alright since my December 13 write-up, climbing more than 22% but trailing Precision Castparts (NYSE:PCP) and Allegheny Technologies (NYSE:ATI) (while outperforming specialty alloy companies Universal Stainless (NASDAQ:USAP) and Haynes International (NASDAQ:HAYN)). There have been some challenges for the company as its major aerospace end market worked down inventories of engine parts and fasteners, but lead times are expanding, nickel prices are rising, and Carpenter is nearly finished with the addition (and customer qualification) of a new premium/super-premium facility in Athens, Alabama.

On the negative side, Carpenter already trades close to its historical average EBITDA multiple (around 8.5x). On a more positive note, the order books of the major commercial aircraft OEMs stretch out for years and should support double-digit growth for several years.

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Carpenter Technology Ready For Demand And Free Cash Flow Growth

Seeking Alpha: Carpenter Technology Upgrading Capacity And Margins At The Right Time

The success or failure of Carpenter Technology (CRS) is ultimately going to have much to do with the fate of the commercial aerospace cycle, so how you feel about that market certainly plays into whether this is a worthwhile idea to consider. Apart from that, though, Carpenter has been making moves to broaden its end market mix (including a growing opportunity in energy). Carpenter is also adding high-end capacity ahead of an expected upswing in demand and this move should prove a good one for both sales and margins.

With more than 40% of sales tied to the cyclical aerospace market (and another 20% or so tied to other cyclical markets like autos/transportation and energy), cash flow-based methodologies don't work particularly well here. Carpenter Technology has historically carried a full-cycle EBITDA multiple around 7.5x, but multiples are usually in the low double-digits at this point in the cycle (ahead of a significant pick-up in results). Assigning a 10x multiple to the average 2014 EBITDA estimate results in a target in the high $60s, and I think Carpenter is an idea worth considering today.

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Carpenter Technology Upgrading Capacity And Margins At The Right Time

Investopedia: Precision Castparts Goes For A Bold And Eminently Logical Deal

When it comes to specialty metal components manufacturer Precision Castparts (NYSE:PCP), it's really never a question as to whether management will do another deal. Rather, it's just a question of who the company will buy, how much it will pay and how successful it will ultimately prove to be.

Last week, though, management announced a real doozy - a $2.9 billion bid for titanium producer Titanium Metals (NYSE:TIE) (aka "Timet"). Although a large and expensive deal would be a significant risk for most companies, Precision Castparts is not like most companies, and I expect this deal will prove to be quite worthwhile for shareholders over time.

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http://www.investopedia.com/stock-analysis/2012/Precision-Castparts-Goes-For-A-Bold-And-Eminently-Logical-Deal-TIE-PCP-AA-BA1114.aspx

Investopedia: Can Aerospace Produce Enough Lift For Carpenter Technology?

Carpenter Technology (NYSE:CRS) has a lot going for it as a company. Few companies can match its technical capabilities (it's just one of three companies capable of making alloys good enough for the demands of jet engines), and there are growth opportunities everywhere for alloys that offer enhanced performance (strength, corrosion resistance, etc.) and less weight. What's more, the company's acquisition of Latrobe and ongoing capacity expansion will significantly boost its capabilities, particularly in premium products.

Yet, for all of those good points, this is a still a cyclical business tied to major end-markets like aerospace and energy. While the surge in commercial aircraft production will almost certainly boost Carpenter's sales and earnings for the next several years, the question is how much of that is already in the stock and whether investors can really expect outsized gains here.

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http://stocks.investopedia.com/stock-analysis/2012/Can-Aerospace-Produce-Enough-Lift-For-Carpenter-Technology-CRS-ATI-PCP-BA0601.aspx

Seeking Alpha: Do Boeing Investors Need To Worry About The Order Book?

Commercial aerospace has moved from a state where investors worried about whether orders would materialize to worrying about the profitability and delivery timelines for those orders. More recently, though, the CEO of a major aircraft leasing company has sounded a warning that aircraft order rates may be unsustainable and suggested that the rich order books at Boeing (BA) and Airbus may end up being something of a mirage.

Warnings From Someone Who Ought To Know
Late in February, Aengus Kelly, the CEO of AerCap Holdings (AER), warned in an interview that the order books at Boeing and Airbus may never be fully realized. For those not familiar with AerCap, it's the third-largest aircraft lessor in the world and presently the largest publicly-traded lessor.

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Do Boeing Investors Need To Worry About The Order Book?

Investopedia: Bulls Onboard Boeing

The stock of American aircraft giant The Boeing (NYSE: BA) seems to always be in "hurry up and wait" mode. Investors and analysts always seem to be more interested in the cycle to come than in the business today. Of course investing is a forward-looking endeavor, but it looks like the long-awaited good times at Boeing are in sight at last.


A Respectable Third Quarter
The good times are close at hand for Boeing, but not exactly here yet. Revenue rose just 4% in the third quarter, as relatively better sales (up 9%) in commercial aerospace offset flat results in the defense business. Within defense, Boeing balanced increased military aircraft revenue with declines in space and service and support revenue.

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http://stocks.investopedia.com/stock-analysis/2011/Bulls-Onboard-Boeing-BA-UTX-HON-GE-COL-WAIR-PCP-HXL-TIE-LMT1031.aspx