CR - Crane Company Is Becoming More Shareholder Friendly

2023-04-27 03:41:44 ET

Summary

• Crane Company has managed to build up a lot of different sources for revenues and it has helped them build up a strong balance sheet able to be leveraged efficiently.
• The market is estimated to continue seeing steady growth and I think Crane Company will be there to experience it thanks to its strong position.
• The company has recently announced a dividend and I think this goes to show the value an investor could get by being invested.

Investment Summary

Crane Company ( CR ) is a company that specializes in four different areas of expertise: Aerospace & Electronics, Engineered Materials, Payment & Merchandising Technologies, and Fluid Handling. The Payment & Merchandising Technologies division is focused on creating solutions to make payments and purchasing more convenient. They offer a wide range of products, including cash dispensers and recyclers, coin dispensers and hoppers, and vending machines. The reason I mention this part of the company is that is been built up as the segment with the highest sales, $338 million in the fourth quarter of 2022, and with the highest operating margin of 24.1%. The company is trading at in my opinion a quite fair valuation and the estimated future earnings seem reasonable. With a strong balance sheet, I think the company offers a stable option for investors and I will be rating CR stock a buy.

Shareholder Value

CR has made some good moves over the years to appease shareholders and create long-term value. In the past, it has been through share buybacks but in a recent announcement the company will distribute a quarterly dividend. I think this is a great move as the company is in a stable financial position as I will discuss more below. The cash flow has been positive for over 10 years despite many bumps and challenges along the way.

The company has an international presence and I think it's reasonable to assume it will experience similar growth as to the industry given the wide range of products and services they provide.

Looking at a report from Research and Markets , they expect the global industrial machinery market to grow 8.6% CAGR between 2022 and 2026. It seems investors are expecting a higher EPS growth to be seen for CR as the company continuously buys back shares at a good rate. I think that partly because of this growth and the stability of the company it has gained a higher valuation than the sector. But that often happens with quality companies and sometimes you just have to suck it up and not sit on your hands waiting for a better opportunity that might not happen.

Financials

Looking at the balance sheet for CR I think there is a lot of good stuff to be seen here. The cash position is the first thing that caught my eye. It has been increasing at a good rate YoY. It increased by almost $200 million from 2021 and reached over $650 million. Taking a quick look at the debt the company has one can see that cash can easily make the company debt-free. Between 2021 and 2022 CR paid off almost $300 million of long-term debt and it's now below $550 million.

What I think causes some worry is that the company took on close to $700 million in short-term borrowings in 2022 that will need to be covered using the cash portion and part of the cash flows which thankfully has remained strong for many years. In 2022 they were $355 million and has helped the company to also buy back shares at a strong yearly rate of around 1%.

The net debt/EBITDA ratio for the company is 1.05 right now which I think really highlights the financial flexibility the company has right now. I am very confident in debt not become an issue for them and the share buybacks can continue. All in all, I see some good moves by the company, like increasing the share position and paying back a lot of debt too.

Valuation & Wrap Up

The valuation of CR I think is neither too high but could defiantly be a little lower to really bolster up the buy case even more. Nonetheless, it's not often you can buy a company with a forward p/e of 21 and with around 12-14% estimated CAGR in EPS until 2027 with the balance sheet CR has.

Looking at the next earnings report coming up I think investors will be and should be looking at the margins. The revenues are expected to take a turn downwards but I think if the net margins can stay around 11-11.5% then I think it would bring some relief to investors. Comments from the management will be important too, the company expects around $3.4-$3.7 EPS for 2023, if margins take a hit in the quarter then the likelihood of achieving the lower end of the guidance goes up. At a forward p/e around 20, the share price might very well get a contraction to be valued more in line with the sector.

I think they are in a great position to leverage the position they have in the market. Looking at a company like Flowserve Corporation ( FLS ) also involved in the industrial machinery industry I think CR looks better. Both companies seem to have good outlooks with the bottom line growing at steady rates and having a decent valuation. What makes me go with CR instead is primarily the strong cash flows they have and the 10.5% margin for it. I think that will over time be able to translate into better value for shareholders as CR can comfortably continue buying back shares and keep going with the dividend. With all the positives I see with CR. I will be rating them a buy. I think market-beating returns are possible over time including both dividends and buybacks.

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