Why Is Carpenter (CRS) Up 5.4% Since Last Earnings Report?

It has been about a month since the last earnings report for Carpenter Technology (CRS). Shares have added about 5.4% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Carpenter due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Carpenter Technology Q3 Earnings & Sales Beat Estimates

Carpenter Technology reported adjusted net income of $39.9 million or 82 cents per share in third-quarter fiscal 2020, which beat the Zacks Consensus Estimate of 77 cents. However, the figure was lower than the year-ago quarter’s net income of $51.1 million or $1.05 per share. This can primarily be attributed to the COVID-19 pandemic, which impacted customer demand and Boeing’s decision to temporarily suspend 737 MAX plane production. Strong commercial and manufacturing execution somewhat offset these negatives.

Net sales of $585 million for the quarter were down 4% year over year. The top line surpassed the Zacks Consensus Estimate of $580 million. Volumes were down 9% on a year-over-year basis.

Cost of goods sold in the fiscal third quarter was down 2% year over year to $476 million. Gross profit declined 11% year over year to $110 million. Operating profit in the reported quarter came in at $58.7 million, down 20% from the prior-year quarter.COVID-19 related disruptions had a negative impact of $5.5 million on the quarter under review. This was on account of disruption in the shipment of certain materials late in the quarter as additional safety measures were implemented across the company’s facilities and as certain customers were unable to accept deliveries due to shutdowns. Operating margin was 10% in the quarter compared with the year-earlier quarter’s 12%.

The company witnessed year-over-year revenue growth of 7% in the Aerospace and Defense end-use market. Revenues in the Medical end-use market inched up 1%. Revenues in the energy, distribution and transportation end-use markets declined 29%, 18% and 17%, respectively. Revenues from the Industrial and consumer end market also decreased 6%.

Segment Performance

The SAO segment reported sales of $488 million, reflecting year-over-year decline of 2%. The segment sold 59,052 pounds, 10% lower than the prior-year quarter. Operating profit climbed 4% year over year to $76.4 million.

The Performance Engineered Products’ net sales declined 16% year over year to $109 million in the fiscal third quarter. The segment sold 3,202 pounds, 10% lower than the year-ago quarter figure. The segment reported operating loss of $0.3 million in the fiscal third quarter compared with the operating profit of $16.6 million recorded in the prior-year quarter.

Financials

The company had cash and cash equivalents of $93 million at the end of the fiscal third quarter, up from the $27 million recorded at fiscal 2019 end. Long-term debt was $552.4 million as of Mar 31, 2020 compared with $550.6 million as of Jun 30, 2019. Cash provided by operating activities decreased to $95 million in the nine-month period ended Mar 31, 2020 compared with $57 million in the comparable period last year.

Actions in the Wake of COVID-19

The company stated that the COVID-19 pandemic continues to impact global economic conditions and customer demand patterns. In this scenario, Carpenter Technologyhas undertaken several actions to initiate cost savings and preserve liquidity, which include implementing temporary leave for certain production and maintenance employees across facilities based on planned production scheduling, implementing a global hiring freeze and cutting down capital expenditures for fiscal year 2021 by approximately 25-30% from fiscal year 2020.  The company also initiated actions to reduce working capital levels, primarily inventory, to align with customer demand.

The company also recently approved actions to exit the downstream oil and gas (Amega West) business and idle two domestic powder metals production facilities. This move will lead to annual savings of $15 million to $20 million.  The company will record associated restructuring charges of $80-$100 million before taxes in fourth-quarter fiscal 2020.
Financials

The company had cash and cash equivalents of $29.9 million in the fiscal second quarter, up from the $28.5 million recorded at the prior-year quarter’s end. Long-term debt was $550.6 million as of Dec 31, 2019, remain flat with the end of fiscal 2019. Cash provided by operating activities decreased to $21.8 million for the quarter from the year-earlier quarter’s $37.8 million.

How Have Estimates Been Moving Since Then?

Estimates revision followed a downward path over the past two months. The consensus estimate has shifted -52.33% due to these changes.

VGM Scores

Currently, Carpenter has an average Growth Score of C, however its Momentum Score is doing a bit better with a B. Charting a somewhat similar path, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Carpenter has a Zacks Rank #5 (Strong Sell). We expect a below average return from the stock in the next few months.

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