Morningstar | No Turbulence for Carpenter Technology in 3Q Amid Solid Profit Growth; $58 FVE Unchanged. See Updated Analyst Note from 26 Apr 2019
Entering the fiscal third quarter with a long-running trend of slow but steady profit growth, Carpenter Technology reported financial results that represented a major leap forward. The company's adjusted operating margins (excluding surcharge) jumped to 14.6% from 9.7% in the same period last year. Especially in light of the April 25 earnings release, we remain confident that our peak margin forecast just above 20% will be achieved in the next five years.Having updated our valuation model, we are keeping our $58 fair value estimate and narrow moat rating unchanged. At current prices, the stock is trading at more than a 10% discount to our fair value estimate.
After excluding an $11 million insurance recovery benefit for the performance engineered products segment, Carpenter's operating income reached $62 million in the third quarter. This represents a sizable 35% increase year on year. Although PEP profits were roughly flat, specialty alloys operations profits grew sharply. Given management's guidance that SAO profits will increase 5%-10% sequentially in the fourth quarter, the company should carry strong momentum into fiscal 2020. Although adjusted earnings above $4.00 per share seemed like a major hurdle just a few quarters ago, we expect Carpenter to safely eclipse this mark next year. Currently, the shares are trading at only 10.6 times our 2020 earnings forecast.
We continue to view the company's exposure to the commercial aerospace end market as a significant profit growth driver in the years ahead. Incremental vendor-approved process qualifications should drive a steadily improving product mix and the benefits of operating leverage at the company's state-of-the-art Athens production facility. According to management, four such qualifications were achieved in the third quarter and more lie ahead. Aside from commercial aerospace, sales to the medical and energy end markets have been strong, growing 25% and 23%, respectively, year on year.
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.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
We have operations in 27 countries.
Unfortunately, this report is not available for the investor type or country you selected.
Browse all ResearchPool reportsReport is subscription only.
Thank you, your report is ready.
Thank you, your report is ready.