Demand Isn’t The Problem For Carpenter Technology; Execution Is (US)

  • Carpenter is seeing very healthy demand trends in key markets like aerospace and energy, but is struggling to deliver impressive operating leverage.
  • The Athens ramp continues to drag on; management says it sees a greater sense of urgency among aero engine customers, but this has been a consistent source of frustration.
  • Carpenter looks undervalued and still has significant margin leverage potential, but management has to start executing on that potential in a more tangible way.

Although demand for specialty alloys has been strong almost across the board, progress remains shaky at best for Carpenter Technology (CRS), as the company’s earnings and cash flow are not reflecting what is actually a pretty healthy demand environment. To the extent it makes anybody feel better, Carpenter isn’t the only alloy company to take a beating in the market, as Carpenter, Universal Stainless (USAP), Haynes (HAYN), and Allegheny(ATI) have all been weak over the past six months as investors have been spooked by the 30% fall in nickel prices and the risk of rising costs, not to mention potentially slower growth in 2019. It’s tough to continue advocating for this company and stock when the results just aren’t coming through. Ramping up the Athens facility has been a much slower process than expected, and management could have done a much better job of forecasting the maintenance-driven earnings shortfall in the last quarter. While the shares do look undervalued below the $50s, and the company’s investments in additive manufacturing could pay off in a bigger way in five to 10 years, it’s tough to keep extending the benefit of the doubt to the company.

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