Standard & Poors has put Carpenter Technology (CRS) on its 5 STAR (STRONG BUY) list.  The company engages in the manufacture, fabrication, and distribution of specialty metals and engineered products.  Products are used in tons of applications, including improving the safety of cars, airplanes and bicycles.

S&P’s case is as follows:

1. Solid long-term earnings growth prospects, low debt levels, and sizable free-cash-flow generation, gives the stock significant upside.

2. The company’s sales of specialty metals to the aerospace and energy markets will boost its long-term growth.

3. Competition includes 10 domestic companies, several dozen smaller domestic producers, and several hundred independent distributors of similar products. Finally, numerous foreign producers export into the U.S. various specialty metal products similar to those produced by Carpenter.

4. S&P sees a 4.7% sales gain in fiscal 2009, and margin and operating income improvement.

5. Carpenter’s free-cash-flow generation will enable it to grow via acquisitions and plant upgrades, and  repurchase shares and increase the dividend.

6. S&P believes Carpenter is worth $78 based on a P/E of 15.2 times their fiscal 2009 estimate. Risks to their recommendation and target price include the possibility that further unanticipated delays in aircraft deliveries may occur in fiscal 2009, preventing a recovery in aerospace demand. Another risk is that GDP growth in calendar 2009 could fail to match forecasted GDP growth in calendar 2008.

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