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Why Shares in This Aerospace Supplier Soared in March

Motley Fool - Fri Apr 5, 12:17PM CDT

Shares in premium specialty alloy company Carpenter Technology (NYSE: CRS) rose 10.5% in March, according to data provided by S&P Global Market Intelligence. The move came in an upbeat month for aerospace-focused stocks, driven by GE Aerospace's (NYSE: GE) upbeat presentation on March 7.

Carpenter Technology's growth prospects

The company classifies itself as the "leading global manufacturer of products, parts, and components made of specialty materials, alloys, and titanium." It generates around half of its sales from the aerospace market. Its other two significant end markets are industrial & consumer (19%) and medical (14%).

As such, aerospace is its primary end market and the determining factor influencing its earnings. Its alloys and products are used extensively in the aerospace industry, including engines, fasteners, and structural and avionics components.

One interesting aspect of Carpenter's solutions is that they are found in the original equipment market (OEM) and the maintenance, repair, and operations (MRO) markets. That's a significant plus in the current environment because, for example, if Boeing continues to struggle to ramp up airplane production, the OEM market will be hurt.

However, if airlines are forced to operate older planes for longer due to Boeing's failure to meet delivery requirements, the demand for MRO services is likely to increase.

An airplane in flight.

Image source: Getty Images.

A growth industry

The good news is that the largest aircraft engine manufacturer in the world, GE Aerospace, recently gave an upbeat assessment of both OEM and MRO markets. GE Aerospace expects engine deliveries to grow by 20% to 25% in 2024 compared to a 38% increase in 2023.

Meanwhile, GE Aerospace sees its services revenue achieving a low double-digit compound annual growth rate from 2023 to 2028.

It all speaks to a positive environment for Carpenter, whether on the OEM or MRO side, because its solutions serve both end markets, and I think it's an outstanding stock to buy.

Carpenter's margin expansion

An upbeat industry assessment is particularly good news for Carpenter because its relatively high fixed costs mean its profit margin is highly leveraged. In plain English, its profit margin goes up significantly with an increase in revenue.

As you can see below, its operating profit margin sank as revenue fell due to the lockdowns, but it's coming back strongly now.

CRS Revenue (TTM) Chart

CRS revenue (TTM) data by YCharts; TTM = trailing 12 months.

Management believes its operating income will grow from $133 million in 2023 to a range of $310 million to $330 million in 2024, and then $460 million to $500 million in 2027. Hitting those targets would mean the stock is materially undervalued on 20 times 2024 earnings.

Should you invest $1,000 in Carpenter Technology right now?

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Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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