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 (CRS -2.83%) benefits from robust end-market growth and an excellent margin expansion opportunity. Positioning and workflow technology company Trimble (TRMB -1.52%) 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.
CRS Revenue (TTM) data by YCharts.
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.
Trimble's growth is just beginning
With Wall Street expecting Trimble's sales to decline by 4.2% in 2024, investors can be forgiven for wondering what it's doing on a list of growth stocks. The answer is that revenue growth isn't the best way to measure the growth trajectory of a company shifting toward more recurring revenue.
Trimble is growing its recurring revenue at a mid-teens percentage rate, and management expects it to grow at an 11% to 13% rate in 2024 as well.
That growth comes from increased adoption of its analytics and modeling capability that improves the daily workflow of its construction/infrastructure, geospatial, and transportation customers (its agriculture business is now part of a joint venture with AGCO).
Whereas Trimble's history lies in hardware products that provide precise positioning, its future lies in the software and services that help the construction industry precisely manage projects and reduce waste; transportation/logistics companies optimize routes and assets; and geospatial companies detail evermore complex spatial data.
Wall Street analysts see Trimble's free cash flow growing from $555 million in 2023 to nearly $900 million in 2026 as the recurring revenue drops into cash generation, making Trimble look like a good value for a growth stock.
Image source: Getty Images.
Stocks to buy
Both stocks are highly attractive, as they are set to improve their fundamental metrics dramatically in the coming years. Carpenter's margins and Trimble's cash-flow generation are set for meaningful expansion, and the market may be missing that fact. As such, they are both excellent stocks for investors willing to buy ahead of the market, waking up to the full growth potential of both stocks.
