Carpenter Technology (CRS): Aerospace Was 120% Of The Growth. Is CRS a Buy?

Carpenter Technology Corporation (CRS) Q4 FY2026 — Reported before the open July 30, 2026 (fiscal Q4 and fiscal year ended June 30). Net sales $851.0M (+12.6%), but +9.0% to $679.7M excluding the raw-material surcharge. Operating income a record $206.9M (+36.7%); diluted EPS $3.23 (+46.2%) vs a $3.09 consensus. SAO adjusted operating margin a record 37.8% vs 30.5% — an 18th consecutive quarter of expansion. FY2026 operating income $702.0M, the most profitable year in company history. FY2027 guided $850-880M (+21-25%); FY2029 target $1.2-1.3B. The stock still closed down 5.1% at $503.71, and was $533.91 on August 3. The framing nobody applied: FY2026 net sales ex-surcharge rose $181.4M and Aerospace & Defense alone rose $217.7M. Aerospace contributed 120% of the growth — the other five end markets together shrank $36.3M. Medical, the bull case's counter-cyclical diversifier, fell 24.2% for the year. Second unwritten line: the record margin was not price. SAO shipped 22.6% more pounds while revenue per pound ex-surcharge FELL 9.6%. Absorption, not pricing power. THE CALL: SELL (4/5, AN EXCEPTIONAL BUSINESS AT A PRICE THAT NEEDS THE NEXT DECADE TOO) — base-case value ~$300.0 vs ~$533.91 today. KEY METRICS: - CALL: SELL 4/5 — fair value ~$300 vs $533.91 (-43.8%). DCF on company guidance: FY2027 adj. FCF guided $400-430M, FY2028 ~$665M, FY2029 ~$904M as brownfield capex rolls off. PV of FY2027-31 $3,003M + $11,548M terminal (3.0% growth, 9% discount) = $14,550M EV, less $297.4M net debt, / 50.4M diluted shares = $283. At 9%: bear $198 / base $283 / bull $436, weighted 25/50/25 = $300. Only one of nine cells clears today's price, and it needs the upside case AND an 8% rate on a cyclical. - AEROSPACE WAS 120% OF THE GROWTH: FY2026 net sales ex-surcharge rose $181.4M; Aerospace & Defense alone rose $217.7M ($1,440.7M to $1,658.4M, +15.1%). The other five end markets together went BACKWARDS $36.3M (-4.0%, $905.4M to $869.1M). Medical fell 24.2% for the year ($296.1M to $224.3M) and 29.6% in Q4 ($76.8M to $54.1M); Transportation -10.8%, Distribution -8.1%. A&D is now 65.6% of sales vs 61.4%. Carpenter is CONCENTRATING, not diversifying — the reverse of the bull framing. - THE RECORD MARGIN WAS NOT PRICE: incremental operating margin on ex-surcharge revenue was 99% for the quarter (sales +$56.0M, op income +$55.5M) and 99% for the year (+$181.4M/+$180.2M). But SAO shipped 22.6% more pounds while net sales ex-surcharge PER POUND fell 9.6% ($11.69 to $10.57); total cost per pound fell 13.0% ($10.82 to $9.41) and operating income per pound rose 12.2%. Fixed-cost absorption, not pricing power — it reverses as fast as it repeats. - CASH CONVERSION FALLS AS EARNINGS ACCELERATE: adj. FCF was 54.7% of adj. operating income in FY2025, 51.6% in FY2026 ($362.3M on $702.0M), and the FY2027 guide of $400-430M on $865M is 48.0% — guided FY2027 capex is $355-375M vs $242.7M spent and ~$150M depreciation, ~2.5x D&A. At $533.91 that is 64.8x guided FY2027 FCF, 50.8x trailing EPS of $10.52 and 32x trailing EBITDA. Receivables +22.0% to $701.9M on 8.6% sales growth; DSO 73 to 82 days. - THE HONEST OTHER SIDE, AND THE STREET: 18 straight quarters of SAO margin expansion, adj. operating income up 5x in 3 years ($133M FY23 to $702.0M FY26), net debt $297.4M (~0.35x EBITDA), and an FY2029 target management calls 'not the peak'. On trailing earnings CRS at 50.8x is the CHEAPEST of the aero-materials complex (Howmet ~66x, ATI ~63x): de-rating risk is sector-wide. Street: Buy (14/6/1), consensus $550.60, median $600.00, range $425-$620. We ALIGN on the business, DIFFER on price. What to watch: Bullish: Medical inflecting back to growth repairs the diversification case; brownfield commissioning on time in early FY2028 with capex falling toward the ~$150M depreciation line, which alone takes FY2029 FCF toward $1B; or a raise above the $1.3B FY2029 top end. Bearish: the Oct 22 print at the low end of the guided $195-200M with Medical still falling; capex above $375M or a brownfield slip; or receivables — DSO went 73 to 82 days. Also on YouTube: @ChargedAlpha DISCLAIMER: For informational and educational purposes only. Not financial advice. Do your own research before any investment decision.