Carpenter Technology Corporation

Moat: 2/5

Understandability: 4/5

Balance Sheet Health: 4/5

Carpenter Technology Corporation (CRS) is a leading manufacturer and distributor of premium specialty alloys, including titanium, stainless steel, alloy steel, and more, catering to high-performance applications in diverse sectors like aerospace, medical, industrial, and energy.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview: Carpenter Technology operates in two primary segments:

  • Specialty Alloys Operations (SAO): This segment focuses on the production and sale of a wide variety of specialty alloys including stainless steel, alloy steel, and titanium products. It includes manufacturing activities with plants in various locations.
  • Performance Engineered Products (PEP): This segment is involved in the manufacturing and distribution of highly engineered products. This part of the company caters to high-growth sectors such as medical, industrial, and energy, among others.

Revenue Distribution: Looking at their latest earnings call, we can see the revenue split per business sector, but more importantly they broke down sales into their individual markets in the following categories:

  • Aerospace and Defense: A significant portion of sales for Carpenter is tied to this segment with sales of 14.8 million $ in Q3 2022 and 187.5 million $ in Q3 2023, a change of +25.1%.
  • Medical: Revenue has gone down by approximately 18% year over year to 144.9 million $ in Q3 2023.
  • Energy: Revenue has declined in the recent quarter by around -2.6%. Total sales in Q3 2023 were 36.6 million $.
  • Industrial and Consumer: Sales grew by 30.8% in Q3 2023 over Q3 2022, reaching 127.7 million $.
  • Distribution: Sales have fallen by 32.1% in Q3 2023 from 177.6 million in Q3 2022.
  • Other: Sales have fallen by 19.7% in Q3 2023 over Q3 2022 and have totaled 39.4 million $ in Q3 2023.

It is important to note that sales figures are net of intersegment sales.

Industry Trends:

  • Increased Demand for Specialty Materials: The aerospace, defense, medical, and energy industries continue to drive demand for high-performance specialty alloys.
  • Globalization and Supply Chain Complexity: The global nature of the supply chain poses challenges in maintaining consistent material supply and pricing.
  • Growing Focus on Sustainability: More focus on sustainability has led to increasing demand for materials with better recycling properties and greater durability.
  • Technology Advancements: The need for materials with advanced properties and performance characteristics will likely drive R&D and innovation.

Margins:

  • Gross Profit: increased by 15.1% in Q3 2023 over Q3 2022.
  • Operating Income: increased to 131.7 million $ in Q3 2023 compared to a prior period operating income of 95.6 million $.
  • Net Income: increased to 110.6 million $ in Q3 2023 compared to 6.9 million $ in Q3 2022.

Competitive Landscape:

  • Intense Competition: The specialty alloys market is characterized by intense competition from both domestic and international players.
  • Niche Markets: Many companies in the aerospace and medical markets focus on specific niches and highly specialized products, rather than focusing on commodities.
  • Customer Relationships: Long-term, and stable relationships with customers and high performance reliability are critical factors for sustained success in the market.

What Makes CRS Different:

  • Vertically Integrated Operations: CRS has vertically integrated operations that allow it to have more control over raw materials, the production process, and the supply chain.
  • Reputation for Quality and Innovation: The company has a reputation for providing high-quality and high-performance materials with strong product engineering.
  • Diverse Customer Base: Carpenter serves a diverse range of end markets including aerospace, medical, energy, and transportation, which limits the negative impact from downturns in specific sectors.

Financials In-Depth:

  • Revenue: Net sales in the third quarter of FY 2024 were 546 million $, a 19.5% increase from the prior year. A mix of improved prices and higher volume has driven the sales increase.
  • Gross Profit: Increased by 15.1% year-over-year to 158 million $, mainly because of the higher volumes. Gross profit was 28.9% of revenue for this past quarter.
  • Operating Profit: increased to 131.7 million $, compared to 95.6 million $ in the prior year.
  • Net income: 110.6 million dollars, significantly better when compared to the 6.9 million seen last year.
  • Capital Structure:
    • Debt: As of June 30, 2022, the company had $498.5 million long-term debt. In September 2022, the company amended the terms of a credit facility, increasing its borrowing capacity to $550 million. The current quarter report notes that it had $404.5 million of debt.
    • Equity: Total shareholder equity was $1,416.9 million as of September 30, 2022, and $1,708.1 in its latest report on September 30, 2023.

Moat Rating: 2 / 5 Carpenter Technology possesses a narrow moat. While it benefits from its vertical integration, reputation for quality, long established relationships, it faces significant competition and can be impacted by technological innovations. Additionally its products, while necessary for its end users, aren’t exactly proprietary. In other words, their products are often not uniquely differentiated, but are very high quality. So though this could be a positive for them, the moat isn’t very strong, as another company might be able to improve their own products in a comparable time. That said, their long-standing brand is of value and the barriers to entry into the premium niche manufacturing segment are somewhat higher than other industries.

Legitimate Risks:

  • Economic Cyclicality: Demand in key markets, especially aerospace, is cyclical, impacting revenue and profitability during downturns.
  • Raw Material Prices: The company is exposed to fluctuations in raw material prices, like nickel and titanium, which can impact their margins.
  • Technology Changes: If they don’t focus on R&D they could be negatively impacted by rapidly developing alternative materials.
  • Increased Competition: Increased competition, from both domestic and international players, would likely lead to price pressures, affecting profit margins.
  • Currency fluctuations: They sell all across the world, and this also comes with risks of losses based on currency fluctuations.

Business Resilience:

  • Diversified Customer Base: Serving multiple end markets makes the business somewhat resilient.
  • Strong Product Portfolio: A diverse range of high-performance materials provides a stable revenue source.
  • Emphasis on Innovation: The focus on developing new materials and processes will allow the company to respond to change.
  • Improved profitability: Recent increases in net and operating income show the company’s ability to turn around its performance.

Understandability: 4 / 5 Carpenter Technology has an easy-to-understand business that revolves around manufacturing and distribution of high-performance metals to large industries. Though the nuances of each end-market, and different operations that they take, may be complex, the basics of the business are easy to understand. The details regarding their balance sheet and finances are also relatively straightforward.

Balance Sheet Health: 4 / 5 Carpenter Tech has a decent, yet not stellar, balance sheet. Although they have a comfortable level of long-term debt in proportion to its equity, and a comfortable cash position, the company isn’t highly flexible because they are still recovering from previous losses. However, this debt has allowed them to pursue more opportunities and expand their business while also having a relatively large cash pile.

Recent Concerns and Problems:

  • The company faced lower earnings in past quarters: The company has struggled with operational and financial difficulties in recent quarters with significant restructuring and asset impairments. However, this seems to be turned around with the Q3 2023 report.
  • Supply chain disruptions: As mentioned above, the global supply chain creates uncertainty in maintaining consistent material supply.
  • Acquisitions: Past acquisitions have failed to bring the expected returns and have led to significant impairment charges.
  • Restructuring: the company is undertaking various restructuring changes and it is still yet to be seen if they will yield results.
  • Market Volatility: The market is always unpredictable and can turn against the company’s stock performance.

They are focused on improving their supply chain, their production efficiency, and their financial health. They recognize the issues they had in the past, and management is working hard towards resolving them.