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Strong Markets & Acquisitions to Drive Carpenter Technology

Zacks Equity Research

On Apr 9, we issued an updated research report on Carpenter Technology Corporation CRS. Strong demand across most of its end-markets, acquisitions, continued execution of its commercial strategy and strong financial position will aid growth.

Upbeat Q2 Earnings, Poised for Improved Q3

Carpenter Technology’s second-quarter fiscal 2019 adjusted earnings per share improved 38% year over year to 76 cents. Thanks to solid commercial execution and market demand, the company delivered its best second-quarter performance since fiscal 2013. Backlog in the quarter rose 49% sequentially — representing 10th consecutive quarter of sequential backlog growth.

For third-quarter fiscal 2019, the company anticipates continued positive demand across most end-use markets for the Specialty Alloys Operations segment. Operating income is expected to increase 5-10% sequentially, after adjusting for insurance recovery. For the Performance Engineered Products segment, continued strong demand for titanium products including orders deferred in the second quarter is likely to bolster revenues in third-quarter fiscal 2019. Operating income is expected to increase up to 60-70% sequentially.

Solid End Markets to Sustain Growth

Sales to the Aerospace and Defense end-use market continues to be strong, reflecting the impact of a robust 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. The company continues to benefit from strong market conditions within the orthopedic and cardiology sub-markets.

Sales to the Energy end-use market have also been increasing on the back of strong oil and gas markets, and improved demand for power generation applications. Industrial and Consumer end-use market sales reflect the impact of stronger product mix for materials utilized in industrial applications and increased demand for sporting good applications.

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 across its businesses. 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 anticipated impact of electrification in the global transportation industry.

Buyouts will also aid the company’s growth. In October 2018, the company acquired all the outstanding shares of LPW Technology, combining its metal powder lifecycle management technology and processes with the Carpenter Technology’s technical expertise in producing highly engineered metal powders and additively manufactured components. In February 2018, the company had acquired all of the outstanding membership interests of CalRAM which helped it foray into the growing part production segment of the additive manufacturing value chain. Earlier, in February 2017, the company acquired all the assets of Puris and entered the promising titanium powder market, and expanded presence in additive manufacturing. The acquisition also strengthens the company’s capabilities as a solutions provider for customers across its end-use markets.

Shares of Carpenter Technology have gained 39% year to date, outperforming the industry's growth of 29.2%.

Zacks Rank & Other Stocks to Consider

Carpenter Technology currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Some other top-ranked stocks in the Basic Materials sector include Innospec Inc. IOSP, Materion Corporation MTRN and Ingevity Corporation NGVT. While Innospec and Materion sport a Zacks Rank #1, Ingevity carries a Zacks Rank #2.

Innospec has a projected earnings growth rate of 3.5% for the current year. The stock has appreciated 21% in a year’s time.

Materion has estimated earnings growth rate of 12.6% for 2019. The company’s shares have gained 8.2%, in the past year.

Ingevity has expected earnings growth rate of 17.9% for 2019. The company’s shares have rallied 48%, over the past year.

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