By Todd Chanko
Dental implants. Cellphones. Golf clubs. Boeing planes. No, these aren't clues frustrating fans of the popular Connections puzzle. They are, nonetheless, connected: Each one began in the heat of Carpenter Technology's high-tech furnaces.
Founded in 1889, the Philadelphia-based company manufactures highly specialized, mission-critical alloys used in aerospace, defense, consumer, medical, and other industrial applications. Its investors presentation cites over 30 disparate product categories, ranging from engines, electric vehicles, weaponry, semiconductors, sporting goods, and orthopedics.
Only three companies in the world -- all in the U.S. -- have the capabilities to produce these special alloys, so supply is limited. At the same time, demand for such alloys to build aerospace, defense, medical, and industrial gas turbines is growing. This supply/demand imbalance contributed to another quarter of record operating income for Carpenter. The company's adjusted earnings per share rose by 47% in its latest quarter to a record $2.77 on a 12% jump in sales over the same period, to $812 million.
Carpenter's competitive advantage, high barriers to entry, and pricing power can drive its stock to $573, corresponding to gains of about 42% from current levels.
"Carpenter's primary advantage is that it can take up to five years to construct and qualify new aerospace-grade nickel capacity," says Brian Keegan, senior research analyst at Sands Capital, which owns 823,000 shares of Carpenter, worth about $323 million at current prices. "The critical nature of these products, which are located near the core of aerospace engines and gas turbines, makes [original equipment manufacturers] hesitant to onboard new suppliers for marginal price differences."
Aerospace and defense -- where Carpenter's alloys are used for landing gear, fasteners, and other components -- comprises two-thirds of revenue. This segment grew 17% year over year in the third quarter of fiscal 2026. Similar growth rates are forecast for the foreseeable future. Customers include Boeing, Airbus, and RTX's Pratt & Whitney. "Commercial aircraft production is gradually ramping after several years of operational mishaps and supply chain challenges at airframers," Keegan says . "This should feed positively into Carpenter's Specialty Alloys Operation volume and pricing over the upcoming years."
Carpenter offers many advantages to investors seeking companies whose competitive barriers to entry are as resistant as its nickel-based alloy Pyromet 41 -- which withstands temperatures as high as 1500 degrees Fahrenheit. It has some pricing power through what management terms "portfolio optimization."
"We can choose the portfolio of alloys that we want to manufacture and obviously drive that toward a higher and higher profit portfolio," John Huyette, Carpenter's vice president of investor relations, tells Barron's. Prices for its aerospace customers increased almost 10% year over year, Carpenter CEO Tony Thene said on the company's latest quarterly call.
Carpenter raised guidance for operating income for fiscal 2026 to a midpoint of $702.5 million, about a 33% year-over-year increase. Carpenter also raised guidance for adjusted free cash flow from a prior 2.1% decrease, to $280 million, to a hike of 22.3%, to $350 million. This improved outlook for free cash flow results from a lower-than-anticipated level of capital expenditures for fiscal 2026 -- about $260 million, down from a previously guided $307.5 million.
Management is confident that growth will continue well beyond fiscal 2027, identifying a "strong market demand outlook for our broad portfolio of specialized solutions," among other contributing factors. Demand is so strong that "over the last three months, we've had customers reach out requesting urgent deliveries," Thene said on the conference call. Boeing on its recent earnings call said it anticipates a pickup in orders for 737s -- from its current level of 42 a month to 47 this summer -- resulting in increased orders for Carpenter.
Even artificial intelligence plays a role in Carpenter's trajectory. Data centers are using industrial gas turbines, or IGTs, for which Carpenter produces the required special alloys. The company's IGT segment comprises only about 5% of revenue, but it is growing.
Carpenter has $164.2 million remaining in its share-repurchase authorization. Assuming that it continues to repurchase shares, combined with the $52.7 million repurchased during the fiscal third quarter, this represents a 1.1% return of capital to shareholders. It pays an annual dividend of 80 cents per share, for a current yield of 0.2%. Carpenter generates a free cash flow yield of 2% and a 23.2% margin on earnings before interest, taxes, depreciation, and amortization, or Ebitda. Its balance sheet is clean, with less than 1 times net debt to Ebitda.
Carpenter, despite its fortified moats, may yet face challenges. "Any delays in deliveries related to the ramp in production for Airbus and Boeing could lead to volatility in earnings," says Cody Smith, portfolio manager for Ceredex Value Advisors, which owns shares. "Cyclical headwinds in CRS' medical businesses in both special alloys operations and performance engineered products have weighed on recent performance, though we think we are nearing an end to these headwinds," adds Sands Capital's Keegan.
Should the oil shock continue much longer than anticipated, the economic effects could reverberate throughout the global economy. Depressed incomes could weigh on the appetite for air travel, cellphone upgrades, even dental implants. Moreover, political instability could dislocate the supply chains for minerals on which Carpenter's operations depend. The company uses forward contracts on its commodity inputs to help dampen price volatility.
At a forward price/earnings multiple of about 33 times, Carpenter's stock is trading at about two times above its recent three-year average. However, the company's excellent free-cash-flow generation, reputation within its industry, and pricing power should see its multiple expand. A discounted cash-flow valuation using a weighted average cost of capital of 9.92% and a terminal value of $25.3 billion produces a 12-month target price of $572. That translates into a forward P/E of 59.
Manufacture your own high-performance portfolio with Carpenter stock.
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May 21, 2026 08:00 ET (12:00 GMT)
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