The company made eight acquisitions during 2012, and all helped to further develop and integrate the vertical business model. This scheme has helped sustain revenue growth, and a 10-year rising operating margin and earnings per share. Such characteristics have shielded the firm from cyclical effects, evidencing the existence of an economic moat and financial strength.
Currently trading at 22 times its earnings, slightly above the industry average valuation, and given the expected dividends and potential for growth, added to a cyclical shield and economic moat, it is recommended as a buy.
Diversification counts
If Allegheny Technologies Incorporated (NYSE:ATI) made a difference through specialty alloys, Carpenter Technology Corporation (NYSE:CRS) is the one who lost on the bargain. But, the company’s strength lies elsewhere: diversity. Its business is spread across the globe, with foreign markets, especially Europe, contributing almost half of its revenue. Holding leading market shares in various segments, this company deserves a closer look.
No new structure has been developed. Carpenter Technology Corporation (NYSE:CRS) has, however, turned its attention to higher-margins and specialty metals. Latrobe and Amega West’s acquisitions, along with the building of a new metal facility in Huntsville, Alabama, are evidence of the attention the firm is giving to the segment. Latrobe is an important landing gear provider, while Amega’s importance is related to drilling and oil extraction. Nevertheless, both require specialty metals that will be provided in part by the new facilities.
Carpenter’s attention to specialty metals corresponds with the increasing revenue share they represent. Faced with growing competition, management chose to raise the bet through acquisitions. The added business were skilfully selected to contribute to the firm’s vertical structure. So, a slight cash reduction should not be alarming.
Having felt the competition’s strength, Carpenter responded with acquisitions. There is no new business model here; acquisitions mean the company will catch a bigger share of the aerospace and oil industries’ expansion. Stock price remains reasonable at 17 times its earnings, but I would still recommend holding until the cycle restarts after the summer.
Bottom line
Any investor looking to buy stock of a metal company should better buy into a firm with a particular talent. Metal-roll producers do not make the cut. Companies that strive to have the technological edge will be rewarded with more clients.
The argument is simple, demand is changing and suppliers have to adapt. Carpenter has taken more time to adapt and revenue suffered, while Allegheny runs ahead of time and positive results have come its way. Precision Castparts Corp. (NYSE:PCP), however, has already established itself in the market and is less exposed to market swings. So, I recommend buying Precision stock if money is not an issue; otherwise, satisfy your appetite with Allegheny.
Damian Illia has no position in any stocks mentioned. The Motley Fool recommends Precision Castparts. Damian is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article Specialty Metals, Vertical Business, and Diversity for Your Portfolio originally appeared on Fool.com and is written by Damian Illia.
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