Unique Aerospace And Defense Specialization Will Secure Future Stability

Key Takeaways

• Strong performance in aerospace and defense markets, with LTAs and build rate ramps driving continued revenue growth and stability amidst tariff concerns.
  
• Expanding margins, strategic specialization, and disciplined cash management are set to enhance earnings growth and shareholder returns through 2027.
  
• The company's dependency on aerospace and defense sectors, and volatility in raw material costs, could significantly impact revenue and operating margins.

Catalysts

Engages in the manufacture, fabrication, and distribution of specialty metals in the United States, Europe, the Asia Pacific, Mexico, Canada, and internationally.

• The Aerospace and Defense end-use market exhibited strong performance, with sales notably up for engines and defense applications. Long-term supply agreements (LTAs) with major customers and ongoing build rate ramps are expected to continue driving revenue growth.
  
• Operating margins, especially in the Specialty Alloys Operations (SAO) segment, have been expanding due to improvements in productivity, product mix optimization, and pricing actions. This ongoing margin expansion is expected to positively impact net margins and earnings.
  
• Carpenter Technology's strategic position in highly specialized, aerospace-related products, which cannot be easily sourced from other suppliers, provides a robust foundation against potential tariff impacts. This specialization is likely to maintain revenue stability.
  
• The anticipated significant free cash flow generation of $1 billion from fiscal year 2025 to 2027, alongside disciplined working capital management, sets a strong base for earnings growth and shareholder returns.
  
• The company's earnings guidance indicates a substantial increase in operating income for fiscal year 2025, projecting continued growth into fiscal year 2027, which is expected to drive earnings expansion.

Carpenter Technology Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Carpenter Technology's revenue will grow by 7.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 12.2% today to 18.2% in 3 years time.
• Analysts expect earnings to reach $654.4 million (and earnings per share of $12.7) by about April 2028, up from $357.7 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 24.2x on those 2028 earnings, down from 27.5x today. This future PE is greater than the current PE for the US Metals and Mining industry at 20.6x.
• Analysts expect the number of shares outstanding to grow by 0.34% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.4%, as per the Simply Wall St company report.

Carpenter Technology Future Earnings Per Share Growth

Risks

• Fluctuations in raw material costs, especially tariffs on specialized imported equipment and raw materials, could affect purchasing costs and impact operating margins.
  
• The company’s reliance on aerospace and defense, which accounts for about 60% of its revenue, poses a risk if there are downturns or delays in these industries, potentially impacting overall revenue.
  
• Despite strong financials, the presence of long lead times, capped order intake, and high inventory levels might signal efficiency challenges, affecting net margins and cash flow.
  
• The potential destocking in the medical end-use market indicates volatility that could result in uncertain demand for some segments, influencing future revenues.
  
• The focus on profitability over volume growth could limit scale economies, impacting revenue growth potential despite higher per-unit profitability.

Valuation

• The analysts have a consensus price target of $256.0 for Carpenter Technology based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $300.0, and the most bearish reporting a price target of just $230.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $3.6 billion, earnings will come to $654.4 million, and it would be trading on a PE ratio of 24.2x, assuming you use a discount rate of 7.4%.
  
• Given the current share price of $197.44, the analyst price target of $256.0 is 22.9% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.