We issued an updated research report on Crane Co. (NYSE:CR) on Jun 4. While the conglomerate is well placed to reap benefits of its initiatives and buyout activities, top-line challenges and cost-related issues might be concerning.
Below we discuss why it will be prudent for investors to hold this stock for now.
Factors Favoring Crane
Sound Financial Performance, Impressive Outlook: The company has a sound earnings surprise history, having beaten estimates in 14 quarters in a row. In the last reported results (for the first quarter of 2019), the company witnessed earnings beat of 4.32% while sales surprise was a positive 5%. Considering the last four quarters, its average earnings surprise was positive 6.74%.
In the quarters ahead, the company anticipates gaining from its focus on product development, growth investments, acquired assets and repositioning initiatives. Adjusted earnings in 2019 are predicted to be $6.25-$6.45 per share, reflecting year-over-year growth of 6% (at the mid-point).
Repositioning Activities: These initiatives started in the fourth quarter of 2017 for Payment & Merchandising, Fluid Handling, and Aerospace & Electronics segments. The aim was to improve profitability, better serve customers through facility consolidations (mainly in North America and Europe) and 3% reduction in the global workforce. These repositioning initiatives are predicted to add 35 cents per share to the company’s earnings by 2020.
Crane is progressing well with these repositioning activities.
Capital Allocation: The company effectively uses capital for making acquisitions, growth investments and rewarding shareholders handsomely. Crane Currency has been one of the most important buyouts for Crane. Since acquired in January 2018, Crane Currency has been strengthening Crane’s Payment & Merchandising Technologies segment. During 2018 till 2021, the Crane Currency buyout is predicted to strengthen earnings by $1.00 per share.
The company rewards its shareholders through dividend payments and share buybacks. In 2018, it used approximately $83.5 million for paying dividends, reflecting 6.5% growth over the previous year, and repurchased shares worth $50.1 million. Further, the company paid dividends of $20.9 million in the first quarter of 2019. Quarterly dividend rate was hiked by 11% in January 2019.
Factors Working Against Crane
Top-Line Woes: The company’s top line in the first quarter of 2019 suffered from 14.5% decline in the Engineered Materials segment’s sales. The poor segmental performance was caused by weakness in the recreational vehicle end market. For 2019, the company’s revenues are predicted to be $3,296 million, reflecting 2% decline from 2018. Core sales are likely to be between 2% fall and 1% growth in the year.
Organic sales for the Payment & Merchandising Technologies segment are estimated to decline 7% and that for Engineered Materials are likely to remain flat year over year.
High Costs and Expenses: These have been bothering Crane for quite some time now. The company’s cost of sales increased 2.5% (CAGR) in the last five years (2014-2018) while operating expenses grew 0.4%. In the first quarter of 2019, an increase of 1.3% and 7% were recorded in costs of sales and operating expenses, respectively.
For 2019, Crane predicts corporate expenses to be roughly $65 million. Integration costs related to acquired assets are likely to be roughly 7 cents per share and repositioning costs are predicted to be 13 cents.
Forex Woes: Geographical diversification, with presence in North and South America, Europe, the Middle East, Asia and Australia, is reflective of a flourishing business of the company. However, this diversity exposed it to headwinds arising from geopolitical issues and unfavorable movements in foreign currencies. In the first quarter of 2019, forex woes adversely impacted sales growth by 3%.
The company predicts forex woes to adversely impact top-line results by 1.5% in 2019.
Stocks Within Industry
Three high-value stocks within the industry in which Crane belongs are General Electric Company (NYSE:GE) , Honeywell International Inc. (NYSE:HON) and United Technologies Corporation (NYSE:UTX) .
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