Carpenter Technology Q4 Outlook Bleak on Coronavirus Crisis

Carpenter Technology Corporation CRS has provided the preliminary outlook for fourth-quarter fiscal 2020 (ended as of Jun 30, 2020) and fiscal 2021.

Segments to Put up Dismal Performance in Q4

Carpenter Technology expects volumes in the Specialty Alloys Operations (SAO) segment to be down 20-30% sequentially in the fiscal fourth quarter on the coronavirus crisis-induced economic disruptions across most of its end-use markets, along with the near-term challenges across the aerospace supply chain. The company now expects the segment’s operating income between $4 million and $8 million for the quarter.

Lower volumes due to the pandemic’s unfavorable impact on customer demand are affecting the Performance Engineered Products (PEP) segment. This segment might suffer operating loss in the range of $8 million to $10 million. The company had earlier predicted the segment to incur an operating loss of $5-$6 million.

Bleak Q4 Guidance

Carpenter Technology has taken several actions to reduce production and is selectively producing materials based customers’ order. The company, thus, expects to reduce inventory by $100-$120 million in the fiscal fourth quarter. Its decision to lower inventory further than previously estimated will adversely impact the operating income and bottom-line performance in the quarter. Considering these estimates, Carpenter Technology expects adjusted operating loss between $16 million and $21 million for the fiscal fourth quarter.  Adjusted loss per share is estimated in the range of 30 cents to 38 cents for the period under discussion.

Solid Financials & Cost-Reduction Actions to Stoke Growth

Carpenter Technology is focused on maintaining strong free cash flow and bolstering its solid liquidity position due to concerns regarding near-term demand situation and economic uncertainty related to COVID-19. It expects to generate free cash flow of $90-$100 million in the fiscal fourth quarter with total liquidity of $317 million as of Mar 31, 2020. For fiscal 2020, the company expects capital expenditures of $170 million.

Carpenter Technology has undertaken several actions to initiate cost savings and preserve liquidity in the current market crisis, which include eliminating approximately 20% of global salaried workforce, implementing hiring freeze and deferring annual merit increases for most salaried employees. The company is also cutting down on capital expenditures for fiscal 2021 by $50 million compared with fiscal 2020, and prioritizing capital investments to target the existing and future growth markets.

It estimates capital expenditures of $120 million for fiscal 2021. It has also initiated actions to reduce working capital levels, primarily inventory, to align with consumer demand. Carpenter Technology is exercising temporary furloughs for certain production, maintenance and salaried employees. Further, it approved actions to exit the downstream oil and gas (Amega West) business, idling the West Virginia powder facility and divesting the Rhode Island powder facility. These actions will save between $60 million and $70 million annually for the company from fiscal 2021.

The company’s facilities continued to operate during the coronavirus crisis, while also fulfilling demand for customers. Its cost-reduction actions to mitigate the near-term headwinds place the company well for long-term growth.

Fiscal 2021 Guidance

For fiscal 2021, Carpenter Technology expects to generate strong free cash flow and positive adjusted EBITDA given its strategic actions and current market outlook. It expects to maintain the present dividend rate. However, the demand scenario is likely to be challenged through the first half of fiscal year 2021. Furthermore, the company’s ample liquidity places it well to sail through the turbulent situation.
 
Price Performance

Carpenter Technology’s shares have gained 13.6% over the past three months, outperforming the industry's growth of 8.9%.

Zacks Rank & Key Picks

Carpenter Technology currently carries a Zacks Rank #4 (Sell).

Some better-ranked stocks in the basic materials space are Sandstorm Gold Ltd SAND, Harmony Gold Mining Company Limited HMY and AngloGold Ashanti Limited AU, all carrying a Zacks Rank #2 (Buy) currently. You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

Sandstorm Gold has an expected earnings growth rate of 33.3% for 2020. The company’s shares have surged 71.8% in the past year.

Harmony Gold has a projected earnings growth rate of 28.6% for fiscal 2020. Its shares have soared 87.7% in a year’s time.

AngloGold has an estimated earnings growth rate of 109.9% for the ongoing year. The company’s shares have appreciated 71.3% in the past year.

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