Baseline equity research, all cap value, Long Only, Value
Contributor Since 2007
I manage Wax Ink, an equity research firm comprised of individual investors not licensed or registered with any government agency. I have been an all cap value investor and independent equity researcher for the past 30 years.
I am not a licensed or registered investment professional. I hold no shares of any company or companies mentioned in this post. I do not follow any company or companies mentioned in this post.
Past and future gains contained in this post are based on actual and anticipated earnings, actual and anticipated dividends, and actual and anticipated price appreciation. Valuations, while given as a specific amount, are always within a valuation range. Investors should be aware that any investment has the potential for loss, and past performance is no guarantee of future results.
I could waste a lot of your time with graphs, charts, and other assorted worthless information all intended to show you that I know something about something when it comes to this company, but the truth is, I know very little about this company. My intent with this post, is to provide you with a brief overview of my various company valuations, all based on the company’s most recent 10-K filing, so you can determine if you have any investment interest.
What They Do
Carpenter Technology develops, manufactures and distributes cast/wrought and powder metal stainless steels and special alloys including high temperature (iron-nickel-cobalt base), stainless, superior corrosion resistant, controlled expansion alloys, ultra-high strength and implantable alloys, tool and die steels and other specialty metals, as well as cast/wrought titanium alloys. Carpenter also manufactures and rents down-hole drilling tools and components used in the oil and gas industry. Listed competitors include Eramet, Allegheny Technologies, and United States Steel.
My current short-term target for the stock is $49.49, with an initial trailing stop set at $46.19. Based on a recent price of $46.89, upward price movement will find resistance at $47.95 and again at $49.26, with final resistance found at $50.53. Downward price movement will find support at $45.64 and again at $44.22, with final support found at $42.67.
There are many different metrics available to help investors determine the theoretical volatility of a stock as compared to the volatility of the entire market. To me, the beta ratio is the metric that is the most representative of a stock’s volatility. A beta ratio of less than 1 means that the security’s price will be less volatile than the market, while a beta ratio greater than 1 indicates that the security’s price will be more volatile than the market. My current beta ratio for this stock is 1.95.
Quality of Earnings
A company’s earnings can be impacted by sources unrelated to the company’s day to day operations. These unrelated sources will distort a company’s earnings and consequently its fair value. Investors should always explore the sources of a company’s earnings to better understand potential valuation impacts. Considering the company’s earnings, 0% of net income came from tax benefits, while 0% of net income came from sources unrelated to day to day operations.
My momentum target for the stock is $84. Momentum targets are determined by integrating a company’s most recent annual EPS and year-over-year earnings growth, with the current yield of a 10-year treasury. Momentum investing often requires investors to trade in stocks that have already enjoyed significant gains while making no allowances for overall market corrections or the sustainability of a company’s earnings.
My growth target for the stock is $44. Growth targets are determined using a company’s year-over-year earnings growth, year-over-year PE growth, and year-over-year price growth.
Five Year Growth of $10K
If you had invested $10K in this stock five years ago (06/30/14), you would have received 158.10 shares of stock with a cost basis of $63.25 per share. Had you held the stock for five years and then closed your position (06/30/2019), you would have closed at $47.98 per share. During that holding period you would have collected $119.84 in regular and special dividends, and your initial $10K investment would have returned to you $7,586 a loss of 24% excluding regular and special dividends.
Cost of Common Equity
The cost of common equity is the minimum annual rate of return an investor should expect to earn when investing in shares of a particular company. I calculate this by adding the thirty-year treasury yield to the beta ratio for the stock multiplied by my default equity risk premium. My cost of common equity for this stock is 7.81%.
The SEC classifies insiders as “management, officers or any beneficial owners with more than 10% class of a company’s security.” Insiders are required to abide by certain rules and fill out SEC forms every time they buy or sell company shares. In addition, to prevent insider trading, or benefiting illegally from material non-public information that their positions give them access to, the law prevents insiders from deposing of shares within six months of their purchase. This effectively bars insiders from profiting from quick trades based on their “insider” knowledge.
Over the past 12 months, the company has recorded 42 insider trades involving 184,803 shares of stock. Of those 42 insider trades, 17 were Buys involving 99,555 shares of stock, and 25 were Sells involving 84,848 shares of stock, creating an insider buy to sell ratio of roughly 1.2 to 1.
Prior Average Valuations
My average valuation for the prior five year period of FY 2014 through FY 2018 was $42. The stock price during that time period averaged $45, earnings averaged $2.01 per share, and the average PE Ratio was 22. The current PE Ratio is 14.
Enterprise and Equity Value
As a fair value investor, I am looking for companies that have low debt and generate lots of cash. To me, the easiest way to highlight a company’s ability to generate cash is to compare the Enterprise Value to the Equity Value, what I call my E2E Ratio. What I am looking for with this ratio is something close to or above 1, meaning the company generates cash at a rate equal to or faster than it generates debt. For this company my enterprise value (market cap plus debt less cash) is $58 and my equity value (market cap plus cash less debt) is $35, making my E2E Ratio, 0.61.
Fair Value Investing
Fair value investing, more commonly known as value investing, requires investors to consider a company’s overall financial condition including past and future earnings growth, free cash flow, both book and tangible book values, net current asset value, and many other valuation metrics. My most recent fair value estimate for this stock as an on-going concern is $59. My worksheet target prices are derivatives of my fair value estimate.
Carpenter Technology Corporation (NYSE: CRS) – FYE 06/2019 – FAIRLY VALUED – The stock is currently trading at levels above my most recent $35 initiate target, but below my most recent $74 reduce target.
There you are, short and to the point.
WaxRevised on 09/03/19
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.