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The two stocks featured in this article are trading up extensively so far in 2024 but for entirely different reasons. Premium specialty alloy-products company Carpenter Technology (NYSE: CRS) benefits from robust end-market growth and an excellent margin expansion opportunity. Positioning and workflow technology company Trimble (NASDAQ: TRMB) continues offering technology that is revolutionizing its market.
The two stocks make for a fascinating comparison of how to invest in growth.
Growth opportunities and operational improvement
The table below outlines the key points to both companies' growth prospects. It suggests their top-line growth opportunity is also leading to a significant improvement in their fundamental metrics.
| Metric | Carpenter Technology | Trimble |
|---|---|---|
| End markets in 2024 | Strong | Mixed |
| Long-term growth opportunity | Ongoing commercial aerospace recovery, aging population's demand for medical implants. | Becoming a larger part of its customers' daily workflow through its modeling and analytics capability. |
| Improving fundamentals | Significant margin expansion opportunity as revenue grows. | Growing recurring revenue in subscriptions and software leads to greater cash-flow generation. |
| Forward P/E Ratio | 17.5 | 23.6 |
Data source: Company presentations, author's analysis. P/E = Price-to-earnings.
Carpenter Technology
This premium specialty alloy manufacturer operates in a range of exciting end markets. In aerospace (50% of revenue), its high-performance solutions help reduce aircraft weight, enabling the production of more fuel-efficient airplanes. In the medical end market (13% of sales), its alloys are used in longer-lasting implants -- likely to be a long-term market as an aging population lives longer.
In common with the lightweight advantages in aerospace, Carpenter's alloys also benefit transportation (7% of revenue) and industrial and consumer (18%) applications. The stock is a great way to play the oncoming ramp in airplane production, and as its sales grow, so will its margins.
As the chart below shows, when Carpenter's revenue collapsed in 2020, its profit margin turned negative, implying an inability to reduce costs to offset revenue declines. That's bad news in a slowdown, but conversely, when revenue picks up, as it is doing now, Carpenter's profit margin will expand significantly.
Management believes it will double its 2019 operating income by its fiscal year 2027. At the end of 2020, Carpenter traded at around 10 times its operating income; doing so again in 2027 (assuming operating income is doubled as expected) implies a nearly 43% upside to the current share price.