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These early quarters of the rise in commercial aerospace presented challenges forcing OEMs to amend production schedules in response to unpredictable component availability from suppliers. This creates an environment for increased performance risk. In the short term, I remain bullish on the multi-year trend of growing narrow- and wide-body aircraft construction as quarterly production may deviate from expectations.
carpenter technology (New York Stock Exchange: CRS) shares are up nearly 15% since the last update, outperforming in a field favored by their rivals. ATI (ATI), hexel (HXL), Howmet (HWM), and Universal Stainless & Alloy (USAP) sees a little more confusion in results and sentiment. We continue to believe that Carpenter is well-positioned to capitalize on growing aerospace demand to improve our financials and valuations, and we believe our stake here remains worthy of consideration.
Decent quarter despite some confusion
Carpenter’s fiscal first quarter results (September quarter) were generally okay, especially considering the external disruption to the business.
Revenue increased 35% year-over-year as reported, but declined consecutively by 7% to $523 million. Value added income (income less metal surcharges) increased 20% year-on-year and decreased 7% sequentially. Total shipments increased 3% year-over-year and decreased 13% sequentially as disruptions from Hurricane Ian prevented shipments from reaching full demand. Average realized price increased 16% year-over-year and 7% sequentially (on a value-added (VAR) basis).
Gross margin improved 400bp year-over-year, narrowing 230bp to 10.5% on reported earnings and up 650bp at VAR to 14.6%, narrowing 330bp sequentially to 14.6%. Input cost inflation remained an issue, and the hurricane similarly did not adversely affect operational efficiency. Looking at gross margins per pound shipped, Carpenter saw an improvement of 111% year-on-year but contracted 12% quarter-on-quarter. Adjusted operating income recaptured a year-ago loss of $8.3 million versus $17.5 million, but he narrowed by a margin of 2.2% from his $14.9 million in the previous quarter. The segment’s overall profit rebounded from last year’s loss ($26.2 million vs. $3.7 million), but fell 7% to $26.2 million, with his consecutive profit margin steady at 7.0%.
By segment, Specialty Alloys Operations (SAO) VAR increased 18% year-on-year, down 7% quarter-on-quarter; underlying volume was up 4% year-over-year, down 14% quarter-on-quarter; % up, up 8% quarter over quarter. Performance Engineered Products (PEP) revenue increased 19% year-over-year and decreased 6% sequentially. Volumes were down 2% year-on-year and 17% quarter-on-quarter (due to the hurricanes), but realized prices were up 21.5% year-over-year and 14% quarter-on-quarter.
Profitability improved in both divisions. SAO earnings rebounded from last year’s losses, down slightly from the previous quarter ($19.9 million, 6.5% margin). Meanwhile, PEP’s profit increased significantly from a meager figure last year, down 23% quarter-over-quarter to $6.3 million. The margin is 7.2%.
Aerospace is recovering well
The commercial aerospace recovery has been more chaotic than analysts expected in 2021 or earlier this year. Flight hours are on the rise and fleet operators still want to upgrade and expand their fleets, but the reality on the ground is more complex.
airbus (OTCPK:EADSY) and Boeing (BA) has fairly outspokenly put the blame on its suppliers’ feet, arguing that uneven and unpredictable component availability has forced it to become more conservative about expanding production.
Looking at the results from suppliers such as ATI and Carpenter, the range of results seems to be widening. Basically, everyone sees growth in the aerospace business, but year-over-year and quarter-to-quarter growth. Engines are the bane of his supply chain, and companies supplying engine manufacturers (especially hot side components) are seeing strong demand.
To that end, Carpenter saw revenue from aerospace and defense customers grow 36% year-over-year and 3% quarter-on-quarter, while aerospace grew 40% year-over-year and 7% quarter-on-quarter. , aerospace engine customers saw 45% year-over-year and 24% quarter-over-quarter growth. Management also noted that lead times have increased, and we’ve heard reports that lead times for some of his components have increased to nearly a year for him. At the same time, Carpenter’s backlog continues to grow, growing 155% year-over-year and 10% quarter-on-quarter this quarter, including aerospace growth of 190% year-over-year and 11% quarter-on-quarter growth. includes growth.
We expect more disruption until at least mid-2023. Boeing was less clear on its production plans at its recent Investor Day, but said it hopes to stabilize 737 production at 31 per month before ramping up to 38 per month (likely in late 2023). I didn’t reveal anything other than that.
Given the power of specialty alloys available for high-temperature engine components, including titanium, and the industry’s limited titanium production capacity, we don’t think Carpenter will be in short supply. reflects that, the CEO endorses the belief that the aerospace recovery is accelerating, prioritizing and continuing to prioritize capacity for aerospace customers where necessary. is shown.
Outlook
We expect demand in aerospace to continue to accelerate as production schedules become more predictable and production ramps up after 2023. I think there is. Demand in the oil/gas, transportation, medical, and industrial markets remains healthy, but Carpenter recently outpaced end-user demand growth as customers sought to rebuild inventories and stabilize their own production schedules. I hope you benefited from your order.
I haven’t made too many changes to my model, but when I move the fiscal year forward one year, the long-term revenue growth drops a bit to about 7%. Given the challenges of aircraft production, I backweighted revenue growth and put it off for several years.
In the long term I think there is still some upside from the company’s underrated efforts in additive manufacturing (industrial 3D printing) and soft magnetics (useful for high performance motors), but commercial aerodynamics Recovery will most likely dominate the narrative. A few years.
The margin improvement hasn’t been a smooth upward curve, but I do see management efforts underway to make the business fundamentally more profitable throughout the cycle. Near-term EBITDA margin estimates are a little lower as the recovery is slower than expected, but mid-to-late teens margins are likely over the next few years.
Conclusion
When discounted cash flow vs. EV/EBITDA is compared, Carpenter’s stock is undervalued and I believe it will greatly benefit the ongoing aerospace recovery. At 8.5x our 2024 EBITDA estimate (backtracking discounted one year), we get a fair value of just over $50, while a discounted cash flow model would yield near-7% long-term earnings growth, Long-term average FCF margins in the mid-single digits also support upside from here.
I don’t really like Carpenter as a long-term core holding because it’s simply too cyclical. May have above average volatility.
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