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Charles Colon

CRS AT A GLANCE

P/E ► 76.7 VERY HIGH EV/EBITDA ► 24.9 AVG ROA ► 1.8% AVG ROE ► 1.8% AVG Debt to Equity ► 1.44 AVG Current Ratio ► 3.81 AVG Interest Coverage Ratio ► 1.45 AVG

 

 

 

 

 

 

Carpenter Technology (NYSE:CRS) manufactures and distributes specialty metals and engineered products.^[1]

The company focuses on niche steel alloys that can withstand extreme pressure and heat or have a specific appearance or chemical properties. The company's customers, which include the aerospace, industrial, consumer, automotive, medical, and energy industries^[2], use this steel to make products such as aircraft engine blades, hip implants, drill collars for oil exploration, and high-definition televisions.^[3] The specialized nature of its products allows Carpenter to charge higher prices.

Unlike most specialty steel makers, Carpenter manufactures but also distributes its products through its own worldwide network of service centers.^[4] These service centers allow Carpenter to build closer relationships with its customers, working with them to customize current products or develop new ones.^[5] Many of these customers are international, as almost 30% of Carpenter's 2007 sales were in foreign markets, and the company hopes to grow this percentage in 2008.^[6]

Business Financials

Carpenter Technology manufactures highly specialized products for niche markets. Many of these products are intended for use in high-stress and extreme-heat environments. The high specialization that characterizes Carpenter's product lines allows the company to demand premium prices for its products. Carpenter manufactures materials used in a wide range of projects, including industrial tools, jet engines, fuel injectors and medical implants.^[7] Over the past few years, a shift in corporate strategy, including production of higher value materials, cost-cutting and increased international sales, has led to financial success for Carpenter Technology.^[8] Revenues in 2007 totaled a record $1.94 billion, with operating income reaching a record $323.8 million as well.^[9] International sales grew 16% from 2006 to 2007 to $574.7 million, amounting to 29.6% of total 2007 sales.^[10] The company announced in December 2007 the sale of its ceramics businesses, which was the lowest-performing of Carpenter's operating segments.^[11]

^[12]

Production by Segment and End-Use Market

Carpenter Technology divides its products into five major classifications: special metal alloys, stainless steels, titanium products, ceramics, and tool and other steels.^[13] For the past two years, the company's special alloys and stainless steel segments have comprised the majority of Carpenter Technology's sales, totaling 82% of 2007 sales.^[14] A breakdown of sales by product class is below.

Source: CRS 2007 10k^[15]

Carpenter Technology produces for a number of markets, with aerospace as the primary customer.^[16] However, the industrial and consumer markets also represents a significant portion of production.^[17] A breakdown of sales by end-use market by revenue generated and by percentage of total sales is below.

Source: CRS 2007 10k^[18]

Key Trends & Forces

12 month trend in steel prices

Globalization of the Steel Industry

• Increasing competition in the Global Steel Industry :Rising international demand for steel, specifically from developing economies like China and India, has resulted in increases in the price of steel. If demand were to slow or stall, this would have negative effects on steel prices and revenues posted by the steel industry. Likewise, if demand continues to rise CRS will continue to enjoy revenue growth. International production has increased along with the rapid growth of international demand, and this threatens Carpenter's economic niche. China's growing role in the steel industry is still undetermined, but rapid growth in both demand and supply imply an ever-increasing role for the country. Carpenter has an advantage over other domestic steel producers in that its products are highly-specialized and directed towards niche markets, and new competitors are unlikely to quickly build the capacity to make products like Carpenter's. However, international penetration of the U.S. stainless steel market in calendar year 2006 was very high, totaling 52% for stainless bar, 44% for stainless rod and 58% for stainless wire.^[19] It may be a matter of time before these foreign competitors diversify into specialized products as well.

• Volatile Raw Materials Prices Impact Carpenter's Margins: The steel industry is an input-heavy and energy-intensive industry. Carpenter demands a number of different raw materials, including nickel, ferrochrome, titanium, chromium, iron scrap and other elements of metal alloys.^[20] The prices of these materials, many of which are traditionally extremely volatile, impact profitability of production, and lately prices for all commodities, from oil to iron ore, have been on the rise. Carpenter makes efforts to use diverse sources and to insulate itself from a drastic rise in the price for any one commodity, and much of the materials costs it encounters can be passed onto its customers. Nonetheless the firm must face the reality that while demand for its products is soaring, the raw materials used to make these products are becoming more scarce.

• The Airline Industry Must Continue to Demand Carpenter's Products: A growing proportion of the company's sales are directed towards the commercial aerospace market.^[21] This end market has recently experienced significant turbulence, especially since the terrorist attacks of 9/11. Increased apprehension about flying coupled with record high oil prices and frequent labor issues may make the future difficult for the airline industry. A decrease in demand from this sector would negatively impact Carpenter's sales.

Competition

Carpenter Technology distinguishes itself from its competitors by focusing on highly-specialized products rather than traditional commodity-type products. Still, stainless steel, traditionally a commodity product, composed 36% of the company's 2007 revenues.^[22] However, Carpenter manufactures only long and bar stainless steel, whereas close competitors such as AK Steel Holding (AKS) focus on the manufacture of flat-rolled products because of the larger US market.^[23] Carpenter also competes in the international markets, with international sales comprising 29.6% of total 2007 sales.^[24] The company's domestic competitors in the stainless steel market are:

Source: Company Reports

References

1. ↑ CRS 2007 10k pg 4
2. ↑ CRS 2007 10k pg 21
3. ↑ CRS Company Website
4. ↑ CRS 2007 10k pg 21
5. ↑ CRS 2007 10k pg 21
6. ↑ CRS 2007 10k pg 20-21
7. ↑ CRS Company Website
8. ↑ CRS 2007 10k pg 21
9. ↑ CRS 2007 10k pg 19
10. ↑ CRS 2007 10k pg 21
11. ↑ CRS Company Website
12. ↑ CRS 2007 10k pg 19
13. ↑ CRS 2007 10k pg 20
14. ↑ CRS 2007 10k pg 20
15. ↑ CRS 2007 10k pg 20
16. ↑ CRS 2007 10k pg 21
17. ↑ CRS 2007 10k pg 21
18. ↑ CRS 2007 10k pg 21
19. ↑ CRS 2007 10k pg 7
20. ↑ CRS 2007 10k pg 4
21. ↑ CRS 2007 10k pg 10
22. ↑ CRS 2007 10k pg 20
23. ↑ CRS 2007 10k
24. ↑ CRS 2007 10k pg 21