Carpenter Technology Hurt by Bleak Transportation Demand
On Feb 25, we issued an updated research report on Carpenter Technology Corporation CRS. The company’s efforts to strengthen customer relationships, execution of its commercial strategy, acquisitions and investments in additive manufacturing will fuel growth. Also, solid demand across most of its end markets, barring transportation, bodes well. However, prevailing challenges in the Amega West business unit might weigh on the company’s near-term performance.
Upbeat Q2 Earnings
Carpenter Technology delivered adjusted earnings of 83 cents per share in second-quarter fiscal 2020, up from the year-ago quarter’s 76 cents per share. Notably, the company has witnessed 12 consecutive quarters of year-over-year growth in both the top and bottom lines. Further, in the fiscal second quarter, its backlog improved 7% year over year, on growth in key Aerospace and Defense end-use markets. This also marks the 12th consecutive quarter of year-on-year backlog growth. Moreover, the company registered stellar fiscal second-quarter operating income performance in six years’ time.
Commercial Strategy & Acquisitions: Other Catalysts
Carpenter Technology continues to bank on the robust market conditions through the execution of its solutions-focused approach. Through the implementation of the Carpenter Operating Model, the company has unlocked incremental capacity via operational process improvements across the SAO and PEP businesses. Moreover, it is well poised to gain from continued execution of commercial strategy and benefits from share gains across end-use markets by solidifying customer relationships.
The company has also increased its 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 the $100-million investment in its precision strip hot rolling mill. This investment will provide enhanced capacity to its soft magnetics portfolio and expand electrification initiatives across multiple markets.
The LPW acquisition has fortified Carpenter Technology’s hold as a dominant Additive Manufacturing Solutions Provider. The company has built its additive portfolio with the acquisitions of CalRam and Puris, and construction of an emerging technology center in Athens, AL, in a bid to bank on rapid AM growth. The company projects capital expenditure of $170 million in fiscal 2020. Also, the company is actively evaluating opportunities to mitigate the unfavorable impact of the Boeing 737 MAX supply-chain disruption.
Segments Poised to Grow
The company continues to drive its product mix and delivered strong fiscal second-quarter operating income in the Specialty Alloys Operations (SAO) business, marking the segment’s second consecutive quarter of record operating performance. The SAO segment is poised to grow on richer product mix, benefits from the Athens facility and continued productivity improvement through the Carpenter operating model.
For the Performance Engineered Products (PEP) segment, the company expects robust demand for titanium products in the Dynamet business to drive its performance. The Dynamet expansion project is likely to close in the fiscal third quarter. The company also plans to make continued investments in additive manufacturing.
However, the Amega West business might face challenges due to headwinds in the oil & gas industry, especially in North America. Given the ongoing challenges, the company initiated restructuring actions in the Amega West business during the fiscal second quarter. Furthermore, the Boeing 737 MAX supply-chain disruption might erode SAO & PEP segment’s operational performance during the fiscal third quarter.
End Markets Strong, Transportation Woes Linger
Solid execution of commercial and manufacturing strategies continues to drive double-digit year-over-year revenue and earnings growth in the Aerospace and Defense and Medical end-use markets. In Aerospace, the company has been witnessing growth in engine and fastener demand, with significant backlog. The Medical end-use market is also poised to perform well on stellar demand, capacity expansion at Dynamet, and positive underlying trends in the orthopedic, dental and cardiology markets. The Dynamet expansion will enable the company to capture emerging growth for high-value titanium solutions in the medical market.
Nonetheless, the transportation end-use market sales have been affected by weaker demand for the company’s applications. This has resulted from trade actions and tariffs, which are affecting customer order patterns. In addition, a dismal global light vehicle market has been depressing sales.
Price Performance
Over the past year, Carpenter Technology’s shares have lost 15.1% compared with the industry’s decline of 28%.
Zacks Rank & Stocks to Consider
Carpenter Technology currently carries a Zacks Rank #4 (Sell)
Some better-ranked stocks in the basic materials space are Daqo New Energy Corp DQ, Sibanye Gold Limited SBGL and Impala Platinum Holdings Limited IMPUY, each currently sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Daqo New Energy has an expected long-term earnings growth rate of 29%. The company’s shares have surged 114.8% in the past year.
Sibanye has a projected long-term earnings growth rate of 20.4%. Its shares have soared 197.2% over the past year.
Impala Platinum has an estimated long-term earnings growth rate of 26.5%. The company’s shares have appreciated a whopping 200.8% in a year’s time.
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