CR - Crane Company: Maintaining A Buy Rating Ahead Of Earnings

2023-07-19 13:38:34 ET

Summary

• Crane Company split into two independent entities, Crane Company and Crane NXT, in April 2023. Crane Company's share price has risen in recent months, trading around $90 per share.
• Crane Company focuses on manufacturing and selling industrial products worldwide, with its core sales growing by 7 - 9% in Q1 2023 due to cyclical recoveries in A&E commercial markets.
• Despite the cyclical nature of the markets, Crane Company's strong financial position and market share growth make it a promising investment.

Investment Summary

Back on April 3, 2023, Crane Company split into two different independent companies, those being Crane Company ( CR ) and Crane NXT (CXT). I wrote an article on Crane Company in late April and as earnings are coming up on July 25, I am still maintaining my buy rating for the company as I view the strength of the business to be resilient. I expect solid earnings to be posted, which should support my buy case.

The market seems optimistic as well about the coming report as the share price has risen quickly in the last few months, trading around $90 per share currently. It has reached a FWD p/e of 23 and I think that still isn't too high when comparing it to the outlook for the business. A large amount of earnings growth is still expected for years to come and I would want to be a part of that as well.

The Split

As mentioned earlier, the company split into two different entities, both with a name relating to “Crane” still. On April 3 the announcement was made that every shareholder of the old company will be receiving one share of CR and one share of CXT.

CXT focuses more on cash/payments for example and various technologies that are related to them. According to the company itself, they offer a unique set of technologies that help deliver secure and authentic solutions for customers' assets. The business is focused on driving growth with the assistance of continuous investments and maintaining a strong position in the market and reaching a high client retention rate.

For CR however, they focus on manufacturing and selling various industrial products worldwide. The segments here are made up of Aerospace & Electronics and Engineered Materials. The first segment supplies crucial materials and products and systems for commercial aerospace companies. The revenues before the split were made up of 40% from the Aerospace & Electronics segment. I expect the coming quarters to continue showing a large discrepancy between the two segments of the new CR company. The engineered materials segment manufactures fiberglass-reinforced plastic panels and coils. These products are mostly used in recreational vehicles and industrial building applications. For coming quarters I think that this will be a key point to view in the business. Being the smallest segment I would like to see a smaller difference between the segments to make CR less reliable on one part to generate revenues.

Quarterly Results

In the first quarter of 2023, the fastest part of the business was actually what today is Crane Company. The core sales grew by 7 - 9% as they experienced cyclical recoveries in A&E commercial markets. The secular trends for the industry seem to be strongly aligned with CR and I expect them to grow with the market for the coming years, which is predicted to experience a 5.9% CAGR between 2023 and 2027.

The segment experienced a decent operating margin improvement on a YoY basis which for me further bolsters a continued buy rating for CR into the next earnings. I'd highlight that the market is coming out of a slump and seemingly into a bullish phase with strong growth as the backlog grew by 27%. For me, the backlog with companies like CR is a very good indication of the state of the markets they are in. If they see strong backlog growth it means demand is rising and companies are more positive about the outlook and realize making investments now will be profitable down the line.

Luckily the strong performance in the largest segment helped offset some of the negative trends seen in the Engineered Materials segment. Here the operating margin compressed, which I think can be contributed to rising material expenses. I expect going into Q2 we might see a consolidation at the 18.3% number, or a slight uptick.

Risks

The cyclical nature of the markets that CR is in will most likely in the future create some quarters where growth might be difficult to achieve and ultimately result in disappointing or neutral YoY growths.

But seeing that CR is strongly gaining market share makes me confident that this will nonetheless help offset some of the otherwise potential losses as the market turns down and investments and backlogs decrease.

Financials

With a net debt of just $150 million following the spinoff, I think that CR remains in a very solid position financially. The coming report will shed some more light on this, but using that $150 million of net debts the ratio to EBITDA would be around 0.58 if we use a discount rate of 15% when estimating the EBITDA that the new company will be generating, a very healthy ratio to be at in my opinion.

CR has for a long time maintained a very healthy financial state to make high-return acquisitions and establish a solid base of earnings to pull from and pass on to shareholders. Historically CR has also been very good at buying back shares constantly. Perhaps not by a large amount each year, but with shareholder-friendly management still in place, I would expect these practices to continue going into the coming years after the spinoff.

Valuation & Wrap Up

The aerospace market is growing at a decent rate and I think CR will be able to outperform it given its strong financial state which can be leveraged to acquire companies and boost earnings ultimately. But historically CR has a strong track record of growing its market share, as seen in the picture above and highlighted in their investor presentation. The p/e sits at a multiple of around 23 right now and with CR being such a solid business I don’t view it as too high, sound fundamentals deserve a higher premium. Compared to a peer like Mueller Industries ( MLI ), CR is trading above it when looking at the p/e, but a solid balance sheet and strong margins make up for this I think. CR also has solid growth and a good amount of the market share which should come with a higher multiple too. Besides, the gross margin of MLI is just 29%, compared to CR which has over 40%. I think there is more upside potential and more momentum related to CR which makes it the better option. Another peer to look at would be Flowserve Corporation (FLS), which focuses on industrial flow management. The margins here look quite bad in comparison to CR, with gross margins of just 28% and FCF margin of 0.32% using the TTM numbers. CR has strong FCF margins and this leaves them with a greater ability to invest in themselves or make strategic acquisitions. FLS doesn't seem to have that same opportunity and that makes an investment case disappear in my opinion.

This results in CR being a buy for me right now going into earnings. This is the same rating as my previous article on CR. If we see a strong result from Q2 I am strongly considering opening a position, if we see an unjustified pullback in the share price.

For further details see: