Is Carpenter Technology Corporation (CRS) a Good Investment?
Carpenter Technology Corporation (NYSE:CRS) might be a compelling opportunity for investors. A recent analysis by Simply Wall St suggests that the stock could be significantly undervalued. Using a two-stage Free Cash Flow to Equity (FCFE) model, the report estimates the company’s fair value at US$279 per share. With the current share price hovering around US$180, this indicates a potential undervaluation of approximately 35%.
Key Findings:
- Undervaluation: Current market price suggests a 35% undervaluation compared to the estimated fair value.
- Analyst Target: The US$195 analyst price target is 30% less than Simply Wall St’s fair value estimate.
Discounted Cash Flow (DCF) Analysis
To determine if Carpenter Technology is fairly priced, the analysis utilizes a Discounted Cash Flow (DCF) model. This method projects the company’s future cash flows and discounts them to their present value. This approach, while not perfect for every situation, provides a valuable framework for assessing intrinsic value.
10-Year Free Cash Flow Forecast:
The DCF model employs a two-stage approach, considering different growth rates over two distinct periods. Initially, the model projects cash flows for the next ten years. Analyst estimates are used where available; otherwise, the analysis extrapolates from previous Free Cash Flow (FCF) data.
(“Est” = FCF growth rate estimated by Simply Wall St)
Terminal Value Calculation:
Beyond the initial ten-year period, the model calculates the Terminal Value, representing all future cash flows. A conservative growth rate, capped at the country’s GDP growth rate, is applied. In this case, the 5-year average of the 10-year government bond yield (2.6%) is used for future growth estimation. The future cash flows are discounted to their present value using a cost of equity of 7.2%.
- Terminal Value (TV): US$881m × (1 + 2.6%) ÷ (7.2% – 2.6%) = US$20b
- Present Value of Terminal Value (PVTV): US$20b ÷ (1 + 7.2%)¹⁰ = US$9.8b
Total Equity Value:
The total value is the sum of the present value of cash flows for the next ten years and the discounted terminal value is US$14b.
Valuation Conclusion:
Based on this analysis, Carpenter Technology appears to be trading at a 35% discount to its intrinsic value, offering potentially attractive value at its current share price of US$180. However, it’s crucial to remember that this valuation is an approximation and that DCF models, like any complex tool, are sensitive to the quality of the input data.
Important Considerations
The most important factors in a DCF calculation are the discount rate and projected cash flows. Investors are encouraged to conduct their own analysis and test various assumptions. The DCF model, however, does not account for industry cyclicality or a company’s future capital needs.
The cost of equity, based on a levered beta of 1.113, serves as the discount rate in this analysis (7.2%). Beta helps measure a stock’s volatility compared to the broader market. The beta is derived from the industry average and is limited to a reasonable range (0.8 to 2.0) for a stable business.
SWOT Analysis Highlights:
The analysis also includes a SWOT (Strengths, Weaknesses, Opportunities, and Threats) analysis:
- Strengths: Earnings growth over the past year exceeded the industry average, and the company has a healthy balance sheet.
- Weaknesses: The dividend yield is low compared to the top quartile of dividend payers in the Metals and Mining market.
- Opportunities: Forecasted annual earnings growth is outpacing the American market.
- Threats: Projected annual revenue growth is slower than the American market average.
Limitations and Further Research:
While the DCF calculation is a valuable tool, it is not the only metric to consider when researching a company. Investors should explore various factors to gain a comprehensive understanding of a company’s potential.
Further research should include examining the company’s risks and earnings forecasts and considering other solid businesses with strong fundamentals.
Simply Wall St updates its DCF calculations daily, so investors can find the intrinsic value of any stock by searching on their site.
Disclaimer:
This article is for informational purposes only and is not financial advice. The content is based on historical data and analyst forecasts using an unbiased methodology. The information is not a recommendation to buy or sell any stock and does not take into account your financial situation or investment objectives. Simply Wall St has no position in any stocks mentioned in the report.
