CRS stock just moved into the S&P SmallCap 600, the Robinhood crowd doesn't hold the stock, and cows really do sleep at night. But what's the stock really worth?

Intent
The intent of this report is to provide the reader with a brief overview of my valuations for this company.

What They Do
Carpenter Technology (CRS) is engaged in the manufacturing, fabrication and distribution of specialty metals, producing high-performance specialty alloy-based materials and process solutions for critical applications in the aerospace, defense, medical, transportation, energy, industrial and consumer end-use markets. Listed competitors include Allegheny Technologies (NYSE: ATI) and United States Steel (NYSE: X).

Acquisitions Highlights
The company listed no new business acquisitions in its most recent Annual Report on form 10-K.

Divestitures Highlights
The company listed no new business divestitures in its most recent Annual Report on form 10-K.

Subsequent Events
In July 2020, the company issued $400 million in aggregate principal amount of its 6.375% senior notes due 2028 in an underwritten public offering. The company utilized a portion of the net proceeds from the offering to repay $250 million in principal amount of the company’s senior notes at 5.20% due July 2021.

In September 2020, the company filed form NT 10-K, notifying the SEC of its inability to timely file its Annual Report on Form 10-K. The reason cited was that the company’s independent registered public accounting firm had not completed its audit of the company’s financial statements and internal control over financial reporting. The Annual Report on Form 10-K was subsequently filed three days later.

Short-Term Target
My current short-term target for the stock is $27.31 with an initial trailing stop set at $19.20. Based on a recent price of $19.49, upward price movement will find resistance at $21.90 and again at $24.00, with final resistance found at $25.89. Downward price movement will find support at $18.40 and again at $17.93, with final support found at $16.19.

One-Year Growth Price Target
My one year growth price target is actually a price target range, determined by adding year over year earning growth to the prior year annual dividend yield and dividing the result by the current annual price to earnings ratio.

For this stock, my one year growth price target range is $13-$20.

Volatility Adjustment
There are different metrics available to help investors determine the volatility of a particular stock as compared to the volatility of the market as a whole. 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.

Basis my current beta ratio for this stock of 2.12, my volatility adjustment to recent pricing is $10 per share, making my current volatility adjusted price $9.

Quality of Earnings
A company’s earnings can be impacted by a variety of sources unrelated to the company’s current day to day operations. Discontinued operations, tax refunds, depreciation, and impairment for example, may distort a company’s operating income and consequently its fair value. Investors should always explore the sources of a company’s operating income to better understand potential valuation impacts.

Of the company’s $2.78 in earnings per share, $0.01 came from some combination of other sources, income taxes, interest, minority interests, or discontinued operations.

Key Performance Indicator Rating
I use key performance indicators (KPIs) as a barometer to measure the effectiveness of management. Several of the metrics that I use are the tangible asset ratio, return on invested capital, free cash flow growth, earnings growth, debt growth, the dividend payout ratio, and the cash conversion cycle. Admittedly, my use of these and other metrics as a way to determine the effectiveness of management is subjective. Based on a 0-105 scale, my KPI for this company is 61.

Five Year Growth of $10K
Had you invested $10K in this company five years ago (06/30/15), you would have received 259 shares of stock with a cost basis of $38.68 per share. Had you held the stock for five years and then closed your position (06/30/2020), you would have closed at $24.40 per share. During that holding period you would have collected $198 in regular and special dividends, and your initial $10K investment would have returned to you $6,308 a loss of 37% excluding regular and special dividends.

Annual Shareholder Return
I calculate annual shareholder return by subtracting the stock price at the close of business on the last day of a company’s fiscal year, from the stock price at the start of business on the first day of the company’s fiscal year, plus any dividends paid during that period, and then dividing the result by the opening stock price on the first day of a company’s fiscal year.

For fiscal 2020, the company spent $0.00 per share buying back company stock, paid a common stock dividend of $0.81 per share, and had year-over-year annual price appreciation of $(23.85), which created a year-over-year annual shareholder return of (47)%.

Over the prior five year period, the company spent an average of $1.03 per share buying back company stock, paid an average annual common stock dividend of $0.76 per share, and had an average annual price appreciation of $(3.05), which created an average annual shareholder return of 0.11%.

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 7.77%.

Insider Transactions
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 59 insider trades involving 272,536 shares of stock. Of those insider trades, 25 were Buys involving 195,879 shares of stock, and 34 were Sells involving 76,657 shares of stock, creating an insider buy to sell ratio of 2.6 to 1..

Enterprise and Equity Values
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 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 $31 and my equity value (market cap plus cash less debt) is $8, making my Enterprise to Equity ratio, 0.28.

Risk/Reward Ratio
I determine my risk reward ratio by subtracting the current price from my terminate target and then dividing that result by my initiate target less a price fluctuation variable of 20%. What I am looking for with this ratio is a value of 2 or greater. My risk/reward ratio for this stock is 2.

Prior Average Valuations
My average valuation for the prior five year fiscal period was $46. The stock price during that time period averaged $42, earnings averaged $2.22 per share, and the average PE Ratio was 19. The current PE Ratio is 7.

Fair Value Investing
To a fair value investor, the basic investing tenet is price determines return. Accordingly it is important to consider that the current market price of an equity is the price negotiated between a willing buyer and a willing seller. This market price is not the fair value of the associated company, but the negotiated price of a single equity trade.

My most recent fair value estimate for this stock is $46.