Carpenter Technology Corporation - Looking for Tim

Carpenter Technology Corporation
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.

Short-Term Value
My short-term (3-6 week hold) target price for the stock is $58.80, with an initial trailing stop set at $55.89. With a current price of $56.74, upward price movement will find resistance at $58.55, with final resistance found at $59.97. Downward price movement will find support at $53.38 and $52.07, with final support found at $50.98.

Days to Cover
The most recent days to cover number is 7. The days to cover number is a measurement of the company's outstanding shares that are currently shorted, expressed as the number of days required to close out all the short positions. The number is determined by dividing the number of outstanding shares currently shorted by the average daily volume. The days to cover number is sometimes used as a volatility precursor for a stock.

The Tax Act
The Tax Cuts and Jobs Act of 2017 makes broad and complex changes to the U.S. tax code, including, but not limited to, (1) reducing the U.S. federal corporate tax rate from 35% to 21%; (2) requiring companies to pay a one-time deemed repatriation transition tax (the “Transition Tax”) on certain earnings of foreign subsidiaries; (3) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries; (4) requiring a current inclusion in U.S. federal taxable income of certain earnings of controlled foreign corporations; (5) eliminating the corporate alternative minimum tax (“AMT”) and changing how AMT credits can be realized; (6) capital expensing; (7) eliminating the deduction on U.S. manufacturing activities; and (8) creating new limitations on deductible interest expense and executive compensation.

To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.

In the case of Carpenter Technology, the company had $99.1 million of indefinitely reinvested foreign earnings for which it had not provided deferred income taxes. Due to a change in foreign cash requirements for one of its foreign subsidiaries, the company changed its intent with regard to indefinite reinvestment of foreign earnings of this subsidiary. As a result of this change, the company repatriated $11.5 million of foreign earnings during fiscal year 2017 and recognized associated tax benefits of $0.9 million. The remaining balance of unremitted foreign earnings continues to be indefinitely reinvested.

Deferred taxes are recorded for temporary differences between the carrying amounts of assets and liabilities and their tax bases. In connection with the Act, during fiscal year 2018 the company recorded a provisional net benefit of $78.9 million for the re-measurement of deferred tax assets and liabilities at the lower U.S. federal tax rate. Although the company believes the net benefit recorded is a reasonable estimate of the deferred tax impact of the Act, the re-measurement of deferred tax assets and liabilities at the lower federal corporate income tax rate is provisional until such time that the underlying temporary differences are known rather than estimated.

A valuation allowance is required when it is more likely than not that all or a portion of a deferred tax asset will not be realized. The company had state net operating loss carryforwards of $339.9 million expiring between 2019 and 2038. A significant portion of the state net operating loss carryforwards are subject to an annual limitation that under current law is likely to limit future tax benefits to approximately $3 million. Valuation allowances increased by $5.4 million during fiscal year 2018 primarily due to the re-measurement of deferred tax assets and corresponding valuation allowances due to the Act as well as the impact of a state tax law change that will limit the company's ability to utilize the state net operating loss carryforwards in future years.

Prior to the Act, undistributed earnings of foreign subsidiaries, totaling $93.8 million were considered permanently reinvested. Upon enactment of the provisions of the Act, the company recorded a $5.0 million accrual for the anticipated one-time mandatory tax on previously deferred foreign earnings (i.e. transition tax). The company is still in the process of evaluating its assertion for indefinite reinvestment.

Operating Income
Income unrelated to a company's day to day operation, such as income tax benefits or income from other 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.

For Carpenter Technology 15% of the company's operating income came from income tax benefits, and 1% of operating income came from other sources.

Insider Transactions
In the past 12 months, the company has reported 61 insider trades involving 414,437 shares of stock. Of those 61 insider trades, 32 were Buys involving 248,117 shares of stock, and 29 were Sells involving 166,320 shares of stock, creating an insider buy to sell ratio of 1.5 to 1.

Mergers/Acquisitions
During FY18, the company acquired all of the outstanding membership interests of MB CalRAM LLC (“CalRAM”), for a cash purchase price of $13.3 million. The acquisition provides the company entry into the part production segment of the additive manufacturing value chain.

Divestitures/Dispositions
There were no company divestitures or business dispositions during fiscal 2018.

Year-Over-Year Metrics
Several year over year metrics that are of interest to many investors are revenue growth, free cash flow growth, earnings growth, debt growth, price growth, and year to date price growth. For Carpenter Technology, revenue increased by 20%, earnings increased by 291%, free cash flow increased by 102%, debt decreased by 10%, and the stock price increased by 29%. Year to date the stock price is up 8%.

Future Value
My future (5 year hold) target price for the stock is $58, which is an average annual return of 0.4%. A prior five year hold of the stock (FY2014- FY2018) would have returned an average of 4% per year. Past and future gains are based on actual and anticipated earnings, actual and anticipated dividends, and actual and anticipated price appreciation. Any investment has the potential for loss, and past performance is no guarantee of future results.

Baseline and Fair Value
As an on-going concern, my current baseline valuation for the company is $50. Baseline valuations are based on free cash flow value, net current asset value, book value, and tangible book value. My current fair value estimate for the stock is $80. The fair value estimate is my current valuation for a stock based on earnings, earnings growth, and the current 5-year yield of a AAA rated corporate bond. Value investing initiate, reduce, and terminate targets are derivatives of fair value.

Other Value Considerations
Other value considerations include the PE Ratio, the PEG Ratio, the Price to Book Ratio and the Price to Tangible Book Ratio. For Carpenter Technology, the PE Ratio is 14, the PEG Ratio is 40, the Price to Book Ratio is 2, and the Price to Tangible Book Ratio is 2.

Fair Warning
Fair warning means that the time for bidding has ended and an exchange is about to be concluded. Carpenter Technology Corporation (NYSE: CRS) - FYE 06/2018 - FAIRLY VALUED The stock is currently trading at levels in line with my most recent $80 fair value estimate. Please See Linked PDF Worksheet

Financial Data
Financial data used in this report was taken from the most recent SEC 10-K filing as reported to the U.S. Securities and Exchange Commission on 08/14/2018 at 16:03:45 HRS.

Disclosure
I hold no shares of Carpenter Technology Corporation
Posted on 08/19/18