CR - Crane: A Successful And Focused Transition

2024-01-09 09:56:05 ET

Summary

• Crane has undergone significant changes, splitting up the business, as shares have been on a tear.
• The company reported solid financial results for the standalone business, with revenues and adjusted earnings exceeding expectations.
• Crane has made acquisitions to fuel growth, but the current valuation of the company is considered too demanding.

I covered Crane (CR) last time on the final day of 2019 when it acquired a smaller part of Circor. The bolt-on deal looked fair, and that same conclusion applied to Crane's own valuation at the time. A modest valuation and leverage position meant that the long term track potential of an investment looked quite good.

What happened is there have been some massive changes at Crane, which eventually split up the business last year. The renewed and focused Crane is awarded lofty valuations (unlike 2019), an observation which makes me a bit cautious here.

Back To 2019

Towards the end of 2019, Crane acquired the Instrumentation & Sampling business from Circor in a $172 million deal, with the manufacturer of valves, fitting, regulators and sampling systems adding over $80 million in quite lucrative sales. This deal was noteworthy as Crane aimed to acquire all of Circor in the summer of that year, yet it decided to go cherry-picking for some assets of Circor.

Needless to say, the deal marked just a small transaction for Crane, which was generating over $3 billion in sales at the time. Roughly 40% of these revenues were generated from fluid handling, with payments and merchandising being responsible for about a third of sales. This was complemented by an aerospace & electronics segment, responsible for about a quarter of sales, and a tiny engineered materials business.

Crane itself was on track to generate $3.2 billion in sales and post earnings close to $6 per share, while net debt of just over half a billion only exceeded EBITDA by a modest amount, although the company had some (asbestos) liabilities as well.

Trading at $86, the company traded at a non-demanding 14 times earnings multiple, while leverage was manageable. While shares did not look extremely compelling, it was solid diversification and non-demanding valuations, which over time should drive long term potential in the shares.

Struggling Along

Fast forwarding since 2019, we first see that Crane has been hit relatively hard by the pandemic. Shares rallied to the $100 mark during 2021, to peak at $120 early in 2023. Following the separation of the business (referred to below), shares of Crane fell to the $70 mark in spring of 2023, although they have recovered to $115 per share at this moment in time.

Moving to early 2022, we have seen the company post its 2021 results. Revenues grew 15% to $3.2 billion, with adjusted earnings posted at $6.66 per share, which is basically at par with the performance in 2019 as the pandemic related declines were offset in 2021.

The company guided for modest advancements in 2022, with sales seen around $3.3 billion and adjusted earnings seen around $7.20 per share. Early in 2022, the company announced its intention to split up the business into two separate businesses with payment & merchandising technologies to be called Crane NXT, and the aerospace & electronics and process flow technologies retaining the Crane name. During the year, the company announced some smaller divestments, as well as the divestment of the asbestos liabilities.

Forwarding to early 2023, the company announced solid results with revenues reported at $3.38 billion and adjusted earnings coming in at $7.88 per share, both exceeding the original outlook for the year.

In April, the separation of both businesses was effectuated with Crane continuing under the name Crane Company with ticker symbol "CR", with investors in Crane given one share in Crane NXT for every share held in Crane.

The New Crane

The new Crane, following the divestment of Crane NXT, has obviously become a lot smaller. Through the first nine months of 2023, the company posted sales of $1.55 billion, which is up small compared to the same period in 2022, although that growth accelerated in the third quarter.

A modest advancement in sales is driven by the growth in aerospace & electronics, offset by softness in process flow technologies and engineered materials. The business has cleaned up its balance sheet, actually including a modest net cash position, while other liabilities have been cut as well.

The company now guides for full year sales growth of 7.5%, with adjusted earnings for the year seen between $4.05-$4.20 per share, which makes it clear that expectations have risen quite a bit. The standalone business of Crane has risen to $114 per share, as 57 million shares grant the business a $6.5 billion valuation, with the unleveraged business trading at 27-28 times adjusted earnings.

Needless to say, investors in Crane themselves have seen solid returns. While the headline share price of Crane has risen from just $80s in 2019 to $114 here, investors have been given a share in Crane NXT as well, now trading at $54. These combined valuations come in at nearly $170, meaning that the combined value of the investment has essentially doubled since late 2019!

Using Balance Sheet Strength To Grow

Alongside the release of the third quarter results, Crane announced a $91 million deal to acquire Baum lined piping GmbH. The next deal took place in the first week of 2024, when Crane announced a $103 million deal to acquire Vian Enterprises.

Combined with Baum, pro forma net debt will approximate $200 million, yet this only results in a leverage ratio of around half times EBITDA. Vian is a designer and manufacturer of multi-stage lubrication pumps and system components for critical aerospace and defense applications. The deal will add about $33 million in sales and $8 million in EBITDA, as the deal multiples at just over 3 times sales and about 13 times EBITDA look largely fair.

Needles, to say, this is a true bolt-on deal, adding about 1.5% to pro forma sales and will not move the needle significantly, and hence will not have a huge impact on the very demanding valuation multiples.

Not Touching Here

After being more upbeat on Crane last in 2019, the valuation of the firm has doubled in the period of just four years, as most of the share price gains have been driven by valuation multiple inflation, and for the remainder only in part can be explained by higher margins and the value created through the spinoff.

Given all of this, I am very cautious here, as the current multiple of Crane, despite the much better positioning of the firm, simply looks too demanding, even if the balance sheet has been shored up very well. Given all of this, shares of Crane do not deserve a space on my watchlist, although the bolt-on dealmaking strategy might be interesting to watch unfold in the coming years.

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