Crane Company Fundamental Analysis

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Crane Company

Last Updated: 21 Mar 2024

NYSE: CR

GICS Sector: Industrials

Sub-Industry: Specialty Industrial Machinery

https://www.craneco.com/

You can download a summary of Crane Companys' fundamental analysis in PDF here.

Management

Crane Company Management

CEO: Max Mitchell

Tenure: 11.2 years

Crane Company’s management team has an average tenure of 5.0 years. It is considered experienced.

Business Overview

Crane Company Business Overview

Crane Company is a diversified manufacturer of highly engineered industrial products, and it organizes its operations into three segments: Aerospace & Electronics, Process Flow Technologies, and Engineered Materials.

Before I describe each of its segments, I want to highlight the company's recent separation.

Crane Holdings completed its separation on 3 Apr 2023, dividing into two publicly traded entities: Crane NXT, Co., and Crane Company. Shareholders received Crane Company stock through a proportional distribution.

Crane Company, with its larger size and financial strength, became the legal successor to Crane Holdings for accounting purposes. This means Crane Company's financial records reflect the combined history of both companies, while Crane NXT is shown as a discontinued operation.

Now, back to Crane Company's operating segments.

Aerospace & Electronics

The Aerospace & Electronics segment is a major player in both commercial and military markets, supplying critical components and systems for aircraft, missiles, and spacecraft.

In 2023, 60% of their sales came from commercial aerospace, while the remaining 40% went to military, defense, and space applications. They cater to both original equipment manufacturers who build new vehicles and aftermarket customers who maintain existing ones, with a 69%/31% split in 2023 sales.

The company designs their products for extreme reliability and precision, including pressure sensors for engine control, braking systems for commercial airliners and fighter jets, and power solutions for spacecraft.

Crane’s Aerospace & Electronics is a leader in several key areas, having pioneered industry-standard technologies. Their core competencies include power conversion for electric vehicles, high-accuracy sensing systems, fluid and thermal management solutions, advanced landing gear technology, and microwave components for defense and space applications.

Crane Company’s Products: Sensing Components & Systems

Process Flow Technologies

Crane Company's Process Flow Technologies segment specializes in highly engineered fluid handling equipment critical for dependable operation in demanding environments. It encompasses three areas: Process Valves and Related Products, Pumps and Systems, and Commercial Valves.

The Process Valves and Related Products division offers a vast array of valves, including isolation and actuation types, alongside complementary products like lined pipes and pumps. Their focus lies in the chemical, pharmaceutical, and general industrial sectors. Manufacturing and customer support span North America, Europe, Asia, and Australia.

Pumps and Systems caters to water and wastewater applications, primarily serving U.S. municipal and industrial markets. Meanwhile, Commercial Valves manufactures valves for non-residential construction, gas utilities, and municipalities, with a production presence in the UK, Middle East, and continental Europe.

Engineered Materials

Crane Company's Engineered Materials segment specializes in manufacturing fiberglass-reinforced plastic panels and coils for recreational vehicles, trailers, and commercial and industrial buildings. They primarily sell directly to vehicle manufacturers but leverage distributors for construction markets.

Crane Company Reportable Segment Revenue for the fiscal year ended 31 Dec 2023. Source: Gurufocus

Crane Company revenue from these geographic areas of Canada, United Kingdom, United States, Continental Europe, and Other international.

Crane Company Revenue Geographic Breakdown for the fiscal year ended 31 Dec 2023. Source: Gurufocus

Trends, Competition, and Strategy Overview

Crane Company Trends, Competition, and Strategy Overview

Crane Company, founded in 1855, focuses on long-term growth through strategic manufacturing. By specializing in highly engineered industrial products for specific markets, Crane leverages its scale and proprietary technology to deliver unique solutions to diverse customer needs.

The company actively manages its portfolio, acquiring complementary businesses and divesting non-core assets. Internally, Crane fosters a performance-driven culture with a strong, aligned management team.

The Crane Business System, a comprehensive framework encompassing operational excellence and customer focus, ensures continuous improvement across all areas. This system, built upon a foundation of integrity, incorporates customer feedback and various tools to drive improvements in safety, quality, delivery, cost, and overall growth.

Let us discuss the trends of two of Crane Company’s segments, Aerospace & Electronics and Process Flow Technologies, before diving deep into its competition.

Crane Company's Aerospace & Electronics segment boasts a robust growth trajectory fueled by its leading market positions, recent program wins, and continuous technological advancements.

The segment is strategically poised to capitalize on several growth drivers such as rising commercial aircraft deliveries, increasing air travel demand, amplified defense spending, and the burgeoning space market.

Moreover, the segment stands to benefit from the electrification trend in aerospace and defense with its targeted investments in next-generation engines, advanced radars, satellite constellations, and power conversion technologies for electric and hybrid vehicles and aircraft.

As for Process Flow Technologies, Crane Company positions its segment to capitalize on long-term growth in essential industries. Chemical, general industrial, water & wastewater, and pharmaceutical sectors are targeted due to factors like rising sustainability efforts, aging infrastructure, stricter wastewater regulations, and an expanding healthcare sector driven by demographics.

Crane Company operates in a highly competitive landscape. The specific competitors vary depending on the geographic region, end market (aerospace, construction, etc.), and product line. While an exact market share or competitor count is elusive, Crane positions itself as a major player across most of its markets.

Their competitive edge hinges on a combination of factors such as high-quality, technologically advanced products, competitive pricing, exceptional customer service, and timely delivery. Revenue depends on a complex web of unpredictable forces like market demand fluctuations, economic conditions, customer spending, contract awards, and credit availability.

The sheer diversity of their end markets also makes quantifying the impact of these factors highly challenging.

Crane prioritizes research and development to refine existing products, meet specific customer needs, and create new offerings. They hold a substantial portfolio of intellectual property, but no single piece is critical enough to cause major disruption if lost. Nevertheless, they actively defend their intellectual property through litigation.

Crane Company Economic Moat

There are many ways to identify Crane Company’s economic moat, but I focus on these 5 sources. The rating is purely subjective and is based on my in-depth understanding of the company.

Crane Company has a narrow economic moat. This is based on its intangible asset, cost advantage, efficient scale, network effect and switching cost.

Crane Company Economic Moat

Economic Moat: Narrow

Crane's reputation for quality and reliability establishes a competitive advantage. Over time, Crane has cultivated enduring customer relationships and a sizable installed equipment base, generating recurring revenue streams.

While the Aerospace & Electronics segment boasts a wide moat, I view the Process Flow Technologies segment as a narrow-moat business and the Engineered Materials segment as a no-moat business.

Let us go through each segment in detail.

Crane's Aerospace & Electronics segment stands out for its strong competitive advantage. Intangible assets like its reputation for quality and reliability are crucial in this market, where failure can be deadly. Crane's sensors and landing gear, for instance, play a vital role in aircraft safety, demanding suppliers meet the highest standards.

The segment further differentiates itself with highly engineered solutions designed for extreme environments. For example, the DC-DC power converters used in NASA's Mars rover.

High barriers to entry exist in the aerospace business due to long-term relationships. After securing a contract, Crane might spend five years developing a new aircraft system, followed by a 20-year production run. Even after production ends, aftermarket sales often continue for another 20 years. This allows Crane to provide parts and service for over 40 years on a typical program.

Decades of experience have built strong relationships with all major original equipment manufacturers like Boeing and Airbus, solidifying Crane's position. In fact, Crane's antiskid brake control systems equip every Boeing commercial aircraft currently flying.

Next, the Process Flow Technologies segment has carved out a competitive niche through its strong engineering expertise and reputation for quality. This, combined with the high switching costs associated with their extensive equipment base, creates a significant barrier to entry for competitors.

Their highly engineered pumps, valves, and sensors play critical roles in industries like wastewater, chemical, and pharmaceutical, demanding exceptional reliability. Designed for harsh environments and demanding applications, Crane's products minimize downtime and offer superior energy efficiency.

This focus on reliability fosters customer loyalty, as switching suppliers in these high-risk applications can be costly. The resulting high attachment rate translates to a robust aftermarket revenue stream, with recurring sales from servicing their large installed base contributing roughly half of the segment's total sales.

Lastly, Crane's Engineered Materials segment, despite lacking inherent switching costs, carves out an edge through superior product quality, continuous innovation, and exceptional customer service. Their dominance in niche markets grants them economies of scale that newcomers would struggle to match, though I view it as a non-core business for Crane.

Crane Company Performance

Crane Company Performance Checklist

My quick performance checklist:

Has Crane Company's revenue consistently grown year over year for the past 5 years? No, it is decreasing.

Is the net income consistently increasing year over year for the past 5 years? It is inconsistent.

Has the cash flow from operating activities shown consistent year-over-year growth for the past 5 years? No, the company had a negative operating cash flow in the fiscal year 2022.

Has the free cash flow remained positive for the past 5 years? No, the company had a negative free cash flow in the fiscal year 2022.

Is the gross margin % consistent or growing over the past 5 years? It is relatively consistent at about 35%.

Has the EPS shown growth over the past 5 years? No, it shows inconsistency.

Crane Company's performance in 2023 was a tale of two sectors. Their Aerospace & Electronics division took flight, soaring 18% to reach $789.3 million.

This skyward trajectory was fueled by a combination of increased production volumes and strong pricing, as aircraft manufacturers ramped up output following the COVID-19 slump. However, a minor headwind came from limited component availability.

On the other hand, the Process Flow Technologies segment dipped 3.3% to $1.07 billion. This decline was largely due to the divestiture of their Crane Supply business, which shaved off $105.8 million in sales. Partially offsetting this was the acquisition of BAUM, which contributed $15.4 million, and a 4.9% organic sales growth driven by strategic pricing.

The Engineered Materials segment also hit a rough patch, experiencing a 13.2% decline to $224.3 million. Weaker demand from recreational vehicle manufacturers was the primary culprit, leading to lower core sales. Price hikes offered some mitigation but could not fully offset the volume drop.

Crane Company's financial performance which includes its revenue, net income, operating cash flow, and FCF over the recent 5 years.

Crane Company Revenue, Net Income, Operating Cash Flow, and FCF (USD Million)

Has free cash flow per share increased over the last 5 years? No, the company had a negative free cash flow in the fiscal year 2022.

Crane Company's free cash flow per share has not grown for the past 5 years.

Crane Company FCF per Share

Management Effectiveness

Has Crane Company's ROE stayed within or above the 12%-15% range year over year for the past 5 years? No, it was 8.8% in the fiscal year 2019.

Crane Company Management Effectiveness

Crane Company's ROE is above its industry average ROE.

Crane Company Return on Equity

Has the ROIC stayed within or above the 12%-15% range year over year for the past 5 years? No.

Crane Company's ROIC is more than its WACC.

Crane Company Return on Invested Capital vs Weighted Average Cost of Capital

The trendline for the number of shares outstanding is declining, which is something that an investor would be pleased to see.

Neither the company nor any "affiliated purchaser" repurchased any shares of company common stock during the year ended 31 Dec 2023.

The number of Crane Company shares outstanding has been declining over the past 5 years.

Crane Company Shares Outstanding (Million Shares)

Crane Company Financial Health

Crane Company balance sheet which includes total equity, total debt, and cash & short-term investments.

Crane Company Financial Health (USD Million)

Current Ratio: 2.3 (pass my requirement of >1.0)

The trend of its current ratio has been relatively flat over the past 5 years, and it is above the industry average.

Debt-to-EBITDA: 0.8 (pass my requirement of <3.0)

Interest Coverage: 10.8 (pass my requirement of >3.0)

Debt Servicing Ratio: 9.9% (pass my requirement of <30.0%)

Crane Company Stock Performance

The following graph sets forth the cumulative total stockholder return to Crane Company’s stockholders for the period beginning 3 Apr 2023, the date of the separation, through 31 Dec 2023, as well as the corresponding returns on the S&P 500 Index and the S&P 400 Midcap Capital Goods Index.

The graph assumes that the value of the investment in the common stock and each index was $100 on 3 Apr 2023 and that all dividends were reinvested.

Crane Company Stock Performance

Stock Performance. Source: Crane Company 10K

Crane Company Intrinsic Valuation

Estimated intrinsic value: USD $63.27

Value is calculated using the discounted cash flow method (considering their cash and debt) and scenario planning.

Average free cash flow used: USD $200.00M

Projected growth rate: 7% - 9%

Beta: 1.1

Discount rate: 8.5%

Ideal margin of safety: 40% (Uncertainty: High)

Price range after the margin of safety: <USD $38.00

Date of calculation: 21 Mar 2024

Crane Company Valuation

I use the past 5 years' free cash flow and apply a weighted average, giving more focus on the recent years. I then round the average to the nearest tens. In some instances, I use a more realistic number to represent the free cash flow.

The total debt and cash and short-term investments are the last quarter figures that are rounded to the nearest tens. In some instances, I use more realistic numbers to represent them.

Crane Company estimated fair value and its 52-week range.

Crane Company Intrinsic Valuation

Comparison of Crane Company price-earnings ratio against its five closest industry peers.

Crane Company Relative Valuation

Crane Company Price-Earnings Ratio vs its Peers

Crane Company price-earnings ratio for the past 5 years and its 5-year average.

Crane Company Historical Price-Earnings Ratio

Additional Resources

I recommend reading The Five Rules for Successful Stock Investing as it greatly helps in my stock analysis. If you want a complete collection of recommended books, please visit here.

My Concerns

Let me share the concerns that I have for each of Crane’s segments.

First, there is the Aerospace & Electronics segment. They are hitched to airlines, which are notorious for being buffeted by everything from jet fuel prices to global pandemics. A slump in air travel means fewer planes zipping around, and that translates to a drop in demand for Crane's products.

To make matters worse, aircraft manufacturers are constantly squeezing them on price, shrinking their profit margins.

On the defense side, things are just as precarious. Crane relies on Uncle Sam's check book for specific programs, and any budget cuts could cripple their sales. On top of that, COVID-19 or other global disruptions could snarl supply chains, delaying deliveries and leaving them scrambling to fulfill orders.

And let us not forget the ever-present threat of regulatory red tape. Not complying with export control laws could land them with hefty fines, contract suspensions, and a tarnished reputation – not exactly a recipe for investor confidence.

Now, let us shift gears to the Process Flow Technologies segment. Here, the challenge is carving out a niche in a crowded marketplace teeming with global giants and regional rivals. They must win customers based on the quality of their products, their industry cred, and top-notch service.

But the problem is, their customers are penny-pinchers, carefully weighing economic conditions, access to credit, and future demand forecasts before they loosen their purse strings. A wobbly economy or volatile commodity prices could slam on the brakes on customer spending, leading to delays, cancellations, or projects put on indefinite hold.

To add fuel to the fire, currency fluctuations, especially a weakening euro, pound, and Canadian dollar, could further erode this segment's performance.

Finally, we have Crane Company's Engineered Materials segment. These folks are betting on the continued good health of the RV, truck, and trailer industries. This makes them vulnerable to economic downturns and skittish consumer spending.

And if you think that is all, think again.

They face competition from cheaper alternatives like aluminum and PVC, which constantly threaten to steal away their market share. On the other side, rising resin and fiberglass costs could squeeze their profits if they cannot convince customers to foot the bill. Supplier dependence throws another wrench into the works, adding an extra layer of risk.

Crane Company might be an intriguing option for some investors, but it comes with a hefty dose of caution. The company boasts a strong balance sheet, a positive sign for weathering potential economic downturns.

However, its economic moat, the competitive edge that shields profits, appears limited. Past performance and capital allocation have not been inspiring either. This uncertainty translates to a significant risk factor.

For investors to consider Crane, a significant margin of safety, ideally 40%, would be crucial to account for the potential downside.

My Concerns

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Crane Company Fundamental Analysis

Crane Company

Table of Contents

Management

Business Overview

Trends, Competition, and Strategy Overview

Crane Company Economic Moat

Crane Company Performance

Management Effectiveness

Crane Company Financial Health

Crane Company Stock Performance

Crane Company Intrinsic Valuation

Crane Company Relative Valuation

Additional Resources

My Concerns