Carpenter Technology (NYSE:CRS) has a lot going for it as a company. Few companies can match its technical capabilities (it's just one of three companies capable of making alloys good enough for the demands of jet engines), and there are growth opportunities everywhere for alloys that offer enhanced performance (strength, corrosion resistance, etc.) and less weight. What's more, the company's acquisition of Latrobe and ongoing capacity expansion will significantly boost its capabilities, particularly in premium products.

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Yet, for all of those good points, this is a still a cyclical business tied to major end-markets like aerospace and energy. While the surge in commercial aircraft production will almost certainly boost Carpenter's sales and earnings for the next several years, the question is how much of that is already in the stock and whether investors can really expect outsized gains here.

Aerospace Has a Longer Runway
(NYSE:BA) and EADS' Airbus are only at the beginning of what should be a multi-year surge in new commercial aircraft production. Not only are these aerospace giants expected to produce quite a few more planes, but these planes are going to include a lot more specialty materials, from carbon fiber from the likes of Hexcel (NYSE:HXL) to more parts made from specialty alloys supplied by Carpenter, Allegheny (NYSE:ATI) and Precision Castparts (NYSE:PCP).

Energy and Transport Are Both Emerging
While the penetration of specialty alloys and materials into aerospace has been a valid investment theme for more than a decade already, it's an increasingly relevant theme in energy and automotive markets as well. Energy exploration (drilling, in particular) is a highly demanding market where companies like Weatherford (NYSE:WFT) and National Oilwell (NYSE:NOV) are increasingly finding that new materials and production methods are necessary to cope with the demands of advanced service needs like fracking and horizontal drilling.

In autos, it's still about power and weight. The more steel a car or truck has, the more horsepower it requires to move that mass around and the more gasoline or diesel it needs. While building a vehicle chassis out of specialty alloy is impractical (though carbon fiber is popular in supercars), high-performance engines, gearboxes and other components increasingly rely on these lighter, stronger alloys to meet performance, efficiency and emissions demands.

Still a Commodity Business at Heart
Although Carpenter has some relatively rare capabilities, and strong share in segments like aerospace fasteners, it is still a near-commodity business that serves cyclical industries. Carpenter hasn't seen quite the same swings in industry capacity as titanium product producers like Titanium Metals (NYSE:TIE) or RTI (NYSE:RTI), but this is nevertheless an industry that has repeatedly swung from over-capacity to under-capacity over the years, with prices and profitability dragged along for the ride.

Given that backdrop, it's not surprising that Carpenter's performance can swing between strong profitability (including double-digit returns on capital) to losses within a decade. Right now, investors are hoping that an extra-long aerospace cycle, combined with growing acceptance in new industrial, energy and medical markets, can smooth out that cyclicality and give Carpenter a more sustainable growth curve. While I suppose it's possible, I don't think it is all that probable.

SEE: Cyclical Versus Non-Cyclical Stocks

The Bottom Line
Given the range of multiples this stock has seen and the probable mid-cycle earnings, it's hard to call Carpenter Technology cheap today. In fact, it looks like it is more or less at fair value. Given that the upswing in titanium seems to be just beginning, it's tempting to call Titanium Metals or RTI a better value.

That said, while I don't really like Carpenter Technology as a long-term stock holding, I do believe upside in the aerospace cycle could lift these shares meaningfully higher. It's just the nature of stocks like this for the Street to contract a case of mass amnesia when the revenue and orders start rolling in and presume that somehow "it's different this time." In other words, while Carpenter Technology may be fairly priced, I'd say there's a better-than-average chance that the shares will swing to overvalued as the commercial aerospace cycle really starts to roll and nimble (and risk-tolerant) investors could profit accordingly.

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At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.

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