Based on our view of Carpenter Technology's (CRS; recent price, $48) solid long-term earnings growth prospects, low debt levels, and sizable free-cash-flow generation, we believe the stock is undervalued compared with most of the metals companies we follow, and we think it has compelling capital appreciation potential.
We believe the company's sales of specialty metals to the aerospace and energy markets will boost its long-term growth. In our view, these two markets are in a secular uptrend and we think increased demand from these industries will benefit Carpenter's long-term sales and earnings per share (EPS).
The stock carries Standard & Poor's highest investment recommendation of 5 STARS, or strong buy.
COMPANY PROFILE
Based in Reading, Pa., Carpenter Technology produces a wide variety of specialty steel, high-performance alloys, and other metal products that improve performance and safety in cars, airplanes, and bicycles; are used in steel implants for medical rehabilitation; and become part of gas turbine units and nuclear reactors. Carpenter products can be found in automobile airbag switches and antilock brakes, airplane landing gear and engine blades, golf clubs and boat shafting, home thermostats and popcorn poppers, and medical tools and pacemakers.
Products are processed from raw materials such as chromium, nickel, titanium, iron scrap, and other metal alloying elements at plants in Pennsylvania, California, and South Carolina. They are divided into five categories, with stainless steel accounting for 36% of sales in fiscal 2007; special alloys, 46%; tool and other steel, 3%; ceramics and other materials, 5%; and titanium products, 10%.
Sales by end market in fiscal 2007 were: aerospace, 37%; industrial, 23%; consumer, 11%; automotive, 12%; medical products, 7%; and energy, 10%.
Stainless steels include a broad range of corrosion-resistant alloys, including conventional stainless steels and many proprietary grades for special applications.
Special purpose alloys are used in critical components such as bearings and fasteners. This product line includes heat resistant alloys that range from slight modifications of the stainless steels to complex nickel and cobalt base alloys; alloys for electronic, magnetic, and electrical applications with controlled thermal expansion characteristics, or high electrical resistivity or special magnetic characteristics; and fabrication of special stainless steels and zirconium base alloys into tubular products for the aircraft industry and nuclear reactors.
Tool and die steels are extremely hard metal alloys, used for tooling and other wear-resisting components in metalworking operations such as stamping, extrusion, and machining. Other steels include carbon and alloy steels purchased for distribution and other miscellaneous products.
Ceramics and other materials include certain engineered products, including ceramic cores for investment castings ranging from small simple configurations to large complex shapes and structural ceramic components, precision welded tubular products, as well as drawn solid tubular shapes. The ceramics unit was sold in March, 2008, for $144.5 million.
Titanium is a corrosion-resistant, highly specialized metal with a combination of high strength and low density. Most common uses are in aircraft, medical devices, sporting equipment, and chemical and petroleum processing. Foreign sales accounted for 30% of the total in fiscal 2007.
Carpenter estimates there are about 10 domestic companies producing one or more similar products that it views as major competitors to its sales in one or more end-use markets. The company also believes there are several dozen smaller domestic producing and converting companies that compete against it in specialty metals. Carpenter's distribution network competes directly with several hundred independent distributors of similar products. Finally, numerous foreign producers export into the U.S. various specialty metal products similar to those produced by Carpenter.