Times are improving for those who work in titanium and other specialized alloys. With the aerospace market reviving and other industries increasingly looking to specialty alloys to solve their needs, these are good days indeed for Carpenter Technology
A producer of various stainless steel, titanium, and other alloys and engineered products, Carpenter Technology booked a strong fourth quarter. Sales climbed 22% as reported and 17% when the benefits of surcharges are backed out. Benefiting from greater operating efficiency and a move toward higher-margin products, Carpenter saw its operating margins expand by nearly 6% for the quarter, excluding the gain on sale of a business.
While the smaller engineered-products business grew revenue by about 15% for the quarter, the far larger specialty metals business grew 22%. Steel alloys rose by 19% (though with 16% lower volume), while titanium was up 69% and powdered products increased 46%. Not surprisingly, margins also expanded notably and operating income from the specialty metals business grew 79%.
Carpenter sells to a wide range of customers, and most of them came through strongly in the quarter. Aerospace orders climbed 52%, medical orders jumped 43%, and automotive orders were 19% higher despite the generally poor state of that industry. Only the power-generation business saw a decline, and that was only 1% over the year-ago level.
One of the attractive aspects of the business is that management appears to make the generation of free cash flow a central target. We at The Motley Fool have often expressed our preference for this measurement of performance, and I consider it to be a positive in the company's favor. Adjusting the company's reported free cash flow performance to exclude gains of sales and dividends paid, it generated nearly $129 million for the fiscal year, up from about $86 million in the prior year.
As is the case for most metals companies these days, Carpenter Technology appears to be cheap by backward-looking metrics. The trailing P/E of 13 (subtracting favorable taxes and the gain on sale) and trailing EV-to-FCF of 13 both look cheap, particularly given the underlying trends in the aerospace and medical markets. That said, it's often dangerous to buy metals companies at low P/Es, since that often marks the peak of a cycle.
While I believe Carpenter Technology may well have a few more years of growth ahead of it, this is not the stock for everyone. Sooner or later, alloy capacity will increase, shortages will go away, and companies will find it difficult to maintain profit growth in the face of declining prices.
For more unalloyed Foolish opinion:
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).