Stock Pick: Carpenter Technology is a rare good buy in a struggling materials sector

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Canada’s materials sector has been pummelled lately—the S&P/TSX Capped Materials Index is down nearly 9.5% over the last 12 months—and many people are saying to stay far away. While it’s a similar story elsewhere around the world, there are some good opportunities if you look hard enough.

One company that a lot of analysts are bullish on is Carpenter Technology (NYSE: CRS), a Wyomissing, Penn.-based manufacture of specialty metals. It creates alloys that go into making airplane frames, power trains for cars, orthopaedic medical applications and much more.

There’s a reason why metals analysts such as Rick de los Reyes of T. Rowe Price like companies like this one: specialty metal operations aren’t nearly as volatile as traditional metals and mining companies. That’s because these companies use a variety of commodities, such as nickel, cobalt and titanium to make their metals. In other words, they’re not relying on the price of one or two commodities.

Carpenter Technologies is one of the best specialty metal franchises out there, says de los Reyes, and several analysts agree. Jeffery Stafford, an analyst at Morningstar, likes the company, in part, because its process is difficult to replicate.

“The firm’s metals are used in demanding environments and must stand up to heat, pressure, and corrosion. These metals must meet complex customer specifications, and in many cases, materials are qualified and tested by the buyer,” he wrote in a January report. “Carpenter employs production methods that are not easy to replicate and the company holds 120 years of metallurgical expertise. We think Carpenter holds competitive advantages in its alloy production operations.”

One of the big reasons this is a buy is that the company sells its metals to businesses in growing industrial sectors, such as aerospace and automotive. It also has clients in the health care and defence sectors.

Some of these industries were affected during the recession, but Stafford says these end-markets are stabilizing and that’s good news for Carpenter.

“Management noted that various markets are steadying sequentially after sustained periods of weak demand, including engine materials to aerospace customers,” he writes. “We’re not expecting a sharp turnaround, but it seems that demand for many of Carpenter’s specialty metals is starting to turn a corner.”

The company is also continuing to grow its business. It bought Latrobe, the leading producer of alloys used in landing gear, in 2011, which  should really payoff now as the aerospace sector expands post-recession. It’s also spending $20 million a year in research and development to stay ahead of the competition.

The stock is currently trading at $59, but Stafford thinks it could hit $64. Other analysts have price targets as high as $87.

“The firm has long-term relationships with customers in the aerospace industry that will not be easily broken,” he writes.