Morningstar | Carpenter Shares Trade Higher After Encouraging 2Q Earnings Release; We See Additional Upside Ahead
With Carpenter Technology's second-quarter results largely on track toward our full-year forecasts, our $58 per share fair value estimate is unchanged. Our narrow-moat rating is also intact. Although shares traded higher on the impressive earnings result, we still view the stock as undervalued. Our fair value estimate continues to be the highest within the range of consensus estimates. Ultimately, although the company has made consistent progress growing profitability in recent years, we see a great deal more potential. This is particularly true given that the company's backlog grew 49% in the quarter and has now increased sequentially for 10 straight quarters. This sets the stage for continued profit growth from higher volumes, greater capacity utilization, and a more favorable product mix.We had anxiously awaited Carpenter Technology's second-quarter results, after the company had reported disappointing first-quarter profits in late-October. Our main concern last quarter was a pause in profitable growth from the company's Specialty Alloys Operations (SAO) segment, which we view as the primary driver of incremental profits going forward. However, the aerospace supply chain is often subject to fits and starts, and we remained confident that the company's upward long-term trend for SAO profits would persist. Indeed, this was confirmed in the company's second-quarter results, as SAO operating income rose 29.1% year on year (after adjusting for a $4.7 million insurance recovery benefit).
For fiscal 2019, we forecast $355 million of EBITDA and earnings of $3.35 per share on $2.45 billion of revenue. Our 14.5% 2019 EBITDA margin forecast now sits only modestly below our 16% midcycle forecast. However, our 10-year explicit forecast period includes cyclical peak margins just above 20% before our midcycle outlook is achieved. The company appears well on track to achieve this trajectory.
Carpenter Technology is a producer and distributor of alloys, including titanium alloys, powder metals, stainless steels, alloy steels, and tool steels as well as drilling tools. The company's alloy-based materials and process solutions are used for applications in the aerospace, defense, transportation, energy, medical, industrial and consumer markets as well as additive manufacturing processes and soft magnetics applications. The company also produces metal powders and parts. The company has two business segments: Specialty Alloys Operations, which consists of the company's alloy and stainless steel manufacturing operations; and Performance Engineered Products, which consists of the company's differentiated operations.
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