Crane (CR) to Benefit From Buyouts Amid Core Sales Headwinds

We have issued an updated research report on Crane Co. CR on Feb 21. The company is known for its diversified portfolio of engineered industrial products.

It currently has a market capitalization of $5.1 billion and a Zacks Rank #3 (Hold). Below we discussed why it will be prudent for investors to hold on to the stock for now.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Factors Favoring Crane

Top & Bottom-Line Projections: The company anticipates adjusted earnings per share of $6.20-$6.50 and revenues of $3.5 billion for 2020, suggesting growth of 5% and 7% from the respective year-ago reported figures.

It noted that strong operating leverage, focus on product development, acquired assets, growth investments and repositioning initiatives (explained in the next point) will be beneficial in the quarters ahead. Crane believes that it is progressing well to achieve an earnings target of $7.50-$8.00 per share by 2021.

Repositioning Initiatives: In fourth-quarter 2017, the company started repositioning activities for Payment & Merchandising, Fluid Handling, and Aerospace & Electronics segments. The initiatives included a 3% reduction in the global workforce and facility consolidations, mainly in Europe and North America. These actions along with the certain proactive repositioning measures taken in the fourth quarter of 2019 for Fluid Handling might be beneficial in the quarters ahead.

For proactive measures taken particularly in 2019, Crane anticipates realizing savings of $10 million in 2022.

Acquired Assets: The company has been investing in acquisitions over time. In 2019, it invested $156.2 million in buyouts (net of acquired cash). Acquired assets had a positive year-over-year impact of 0.1% in the year.

During fourth-quarter 2019, Crane acquired Cummins Allison, adding strength to its Crane Payment Innovations business. Also, in the same month, Crane signed an agreement to buy the Instrumentation & Sampling business of CIRCOR International, Inc. CIR. The acquisition, when completed, will likely add more value to Crane’s process valve business.

The company anticipates that acquisition of CIRCOR International’s Instrumentation & Sampling business and Cummins Allison will boost its earnings by 15 cents per share in 2020 and by 25 cents in 2022. Further, Crane expects that acquired assets will boost its sales by 8% in 2020.

Rewards to Shareholders: The company believes in rewarding shareholders handsomely through share buybacks and dividend payouts. In 2019, it distributed dividends totaling $93.2 million and repurchased shares worth $79.9 million.

It is worth mentioning here that the company announced a hike of 10% in its quarterly dividend rate to 43 cents per share in January 2020. We believe that healthy cash flow will support it to return more value to shareholders in the quarters ahead.

Factors Working Against Crane

Segmental Woes: For 2020, the company predicts that organic sales for Engineered Materials will fall 1% year over year, while that for Fluid Handling will be flat. Also, it noted that low demand from the U.S. government at Crane Currency will affect Payment & Merchandising Technologies’ performance. Also, the segment’s margin might be impacted by the Cummins Allison buyout. For Aerospace & Electronics, Crane believes that issues with 737-MAX production might be dragging. The segment’s core sales will likely decline 3% in the year.

For 2020, Crane’s organic sales are predicted to be down 2% to up 1% year over year.

High Debts & Cost Woes: High debts increase financial obligations and in turn, hurt profitability. Crane’s long-term debts increased 19.4% (CAGR) in the last three years (2017-2019). Exiting 2019, the metric stood at $842 million, while interest expenses totaled $46.8 million in the year.

Further, charges related to repositioning activities are concerning. In 2019, repositioning costs had an adverse impact of 43 cents per share compared with 18 cents in the previous year.

Forex Woes: Presence in the Americas, the Middle East, Europe, Australia and Asia exposed Crane to geopolitical issues, macroeconomic challenges and unfavorable movements in foreign currencies. In fourth-quarter 2019, forex woes adversely affected the company’s sales by $4 million.

For 2020, it believes that forex woes will lower sales by 0.5-1%.

Share Price Performance and Earnings Estimate Revision: Market sentiments have been against Crane for quite some time now. Its stock price has increased 3.6% in the past three months compared with the industry’s growth of 4.5%.

Furthermore, the company’s earnings estimates have been lowered in the past 30 days. Currently, the Zacks Consensus Estimate for its earnings is pegged at $1.30 for the first quarter and $6.37 for 2020, suggesting declines of 20.2% and 0.3% from the respective 30-day-ago numbers.

Crane Company Price and Consensus

Crane Company price-consensus-chart | Crane Company Quote

Two Industry Peers

It is worth mentioning here that Crane’s price performance in the past three months compares unfavorably with 5.2% growth in Carlisle Companies Incorporated’s CSL shares. Notably, shares of another peer, Honeywell International Inc. HON, gained 2.2% in the same timeframe.

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