Crane: Many Moving Parts, But Underlying Value Worth Considering

This may be the year of the tiger in the Chinese zodiac, but it’s been a year of the duck for Crane (NYSE:CR) – while things may look relatively calm at the surface level, there’s a lot of activity going on beneath the waterline. Not only has the company been navigating some challenging cross-currents in multiple businesses, as well as a still-tough supply situation, the company has pushed forward with a business reorganization and an offloading of asbestos liabilities.

It's fair to note that Crane’s organic growth has lagged the broader industrial sector this year so far, but I do think there’s more of a “coiled spring” here heading into a more challenging 2023 than for many industrials. The shares are down about 11% since my last update, outperforming the broader industrial group a bit, but I do still see some worthwhile value here now.

 

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Crane: Many Moving Parts, But Underlying Value Worth Considering

Crane Is Just Starting To Lift

With process industries, aerospace, and retail/leisure activity picking up, it shouldn’t be altogether surprising that Crane (NYSE:CR) shares are doing better, particularly when management execution seems to be improving as well. Relative to my last update on the shares, Crane is up about 8%, beating the S&P 500 as well as the broader industrial sector (by close to 10%).

I don’t think Crane’s run is over yet. Process industries are just starting to recover, and even if the market is anticipating that, there are opportunities to grow the business and boost margins. Aerospace is just starting on what should be a nearly decade-long growth cycle, and recovering retail activity and acute labor pressures should drive more growth in the Payment & Merchandising Technologies (or PMT) business. On top of that, there’s margin leverage and capital redeployment potential here, and I can see a path to double-digit annualized returns from here.

 

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Crane Is Just Starting To Lift

Crane Getting Some Credit For Cycle Leverage, But Has More To Give

 

Up about 25% and beating the broader industrial sector by about 7% since my last update, I can’t complain that Crane (CR) is going neglected and unappreciated by the Street, or at least not to the same extent. While Crane came close to matching the broader multi-industrial group for organic growth in Q2, about half of the business is in longer-cycle markets that really haven’t recovered yet, so there’s still more to come.

The shares look undervalued on my numbers, which are in turn lower than sell-side estimates and management’s projections offered in recent investor updates. If management can deliver to that even higher standard, double-digit returns are still very much in play from here.

 

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Crane Getting Some Credit For Cycle Leverage, But Has More To Give

Crane Has Cycle And Performance Challenges, But Looks Undervalued

For as long as I’ve followed the company, Crane (CR) has never seemed all that popular. To some extent I can see why. The company’s a bit of a hodgepodge in a time when conglomerates aren’t so popular, there’s no software, automation, or electrification angle here, the company’s Fluid Handling business does seem to under-earn, and management has made some iffy capital allocation choices. Still, we’re talking about a company that has grown FCF at an annualized double-digit rate over the last decade while often generating double-digit returns on invested capital.

Since my last piece on the company, where I again thought the shares were undervalued even considering the pandemic, cycle risk, and so on, the shares have risen more than 50%, outperforming its peer group by a wide margin (close to 35%). Even with that outsized outperformance, I don’t think the shares are overvalued, and this still looks like a relative bargain even allowing for the less-than-perfect issues.

 

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Crane Has Cycle And Performance Challenges, But Looks Undervalued

Crane Beaten Down On Weak Cyclical Leverage

There’s been a sharp divergence this year between industrials, which were hit hard in March but have largely come back, and aerospace companies which were hit hard in March and have basically stayed down ever since. While Crane (CR) is undeniably leveraged to aerospace (it was the company’s highest-margin business by far) and also leveraged to consumer/leisure more than most multi-industrials, the nearly 40% year-to-date decline in Crane’s share price seems excessive to me.

To be sure, I do have some concerns about Crane. I’m concerned that the Fluid Handling doesn’t earn the sort of margins it should for its supposed reputation and market share, and I’m likewise concerned that Crane will find it hard to break out of what has been a relatively narrow operating margin band since 2013, particularly with a longer path to normal in the aerospace business. Still, I’m only looking for long-term revenue growth on the cusp between the low and mid-single-digits, and not much margin/FCF margin improvement, and Crane looks undervalued relative to what I think are reasonable, if not conservative, assumptions.

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Crane Beaten Down On Weak Cyclical Leverage

Crane's Results And Guidance Were A Relief, But The Growth Outlook In 2020 Isn't Great

Judging by the reaction to Crane’s (CR) reported results and guidance for 2020, I think investors were largely relieved that things weren’t worse. The suspension of production of the 737 MAX is going to hurt the Aerospace business in the near term, and Crane’s Fluid Handling business is seeing the expected slowdown in process-oriented industries. Amidst that, the performance of the Payments business is still something of a wildcard.

I like Crane primarily for the valuation, but the markets tend to reward growth and margin leverage and both could be lacking for Crane in 2020 as the process slowdown and the MAX suspension push the progress on those fronts out a year. Calling this a “neutral” for the next quarter or two would probably be better for my own performance numbers, but that’s more of a trading call and I still see underlying value in this business.

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Crane's Results And Guidance Were A Relief, But The Growth Outlook In 2020 Isn't Great

Crane Undervalued On Disappointment With The Banknote Business

Aggravate the Street at your own risk. That would seem to be a fairly logical takeaway from Crane’s (CR) recent results, as sell-side analysts and institutional investors seem increasingly frustrated, if not exasperated, by the unpredictability of the banknote business within Payment & Merchandising Technology. So much so, in fact, that I think the Street is overlooking what has been a pretty decent performance trajectory in the Fluid Handling business and improving fundamentals and outlook for the Aerospace business.

Going into 2020, Crane looks like one of the few industrials I follow that is actually notably undervalued. I see some risk/likelihood that the Fluid Handling business slows in 2020, but I think this is a name to consider as an overly-beaten down multi-industrial.

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Crane Undervalued On Disappointment With The Banknote Business

Crane Executing Well Despite A Lot Of Cross-Currents

The good, and bad, of running a conglomerate is that there’s always a lot going on – it’s relatively rare for a diversified business to see all of its units doing well (or poorly) at the same time. In the case of Crane (CR), Fluid Handling (or FH) is doing well on underlying strength in a range of process industries, and Aerospace & Electronics (or AE) is likewise benefiting from strong trends in the commercial aerospace market. On the flip side, the Payment and Merchandising Tech (or PMT) business is dealing with challenging comps in the currency business and Engineered Materials (or EM) is suffering from weakness in the RV market.

All told, though, Crane is doing well in absolute and relative terms, and while there are some signs of slowing momentum, I believe the company will hit its near-term targets and generate mid-single-digit long-term FCF growth. I don’t know whether CIRCOR (CIR) management can be persuaded to see reason, but Crane has other M&A prospects to consider, and the valuation remains surprisingly reasonable.

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Crane Executing Well Despite A Lot Of Cross-Currents

Crane Going Hostile In An Effort To Acquire CIRCOR's Under-Managed Assets

Multi-industrial Crane (CR) had indicated before that they were interested in M&A, particularly synergistic deals in the fluid handling and/or aerospace businesses, and now, it’s clear that they’re serious about it. After trying unsuccessfully to engage the board in a friendly negotiated transaction, Crane has gone public with a hostile bid for chronic underperformer CIRCOR (CIR) that I believe offers shareholders more value than they’ll ever see from its current management team.

I don’t know how this story ends, but it’ll be interesting to watch. CIRCOR’s press release confirming the rejection of the deal makes for good comedy, but the reality is that closing hostile deals isn’t so simple. I believe the relatively concentrated ownership of CIRCOR could help apply pressure to the board (GAMCO, Vanguard, Royce, and T. Rowe Price collectively own 45% of the shares), and I believe Crane’s deal is quite fair, but there is no certainty that this deal can get done.

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Crane Going Hostile In An Effort To Acquire CIRCOR's Under-Managed Assets

Crane's Sluggish Growth Guidance And First Quarter Head Fake Won't Help The Shares

Crane's (NYSE:CR) first quarter results, and the reaction to them, sort of remind me of what happens when you have a smart dog and you do the "pretend to throw the ball but actually don't" trick. While the growth in this first quarter looked very strong, it's not going to last, and the underlying trends in the business are more in the range of "okay" than exciting.

I have very mixed feelings on Crane as an investment. The growth and margin outlook, not to mention the growth and margin history, aren't exceptional, and it can be challenging to generate above-average long-term gains from average performers. On the other hand, Crane is leveraged to what should be comparatively healthy markets, and management has plans in place to improve the margin profile. With the shares more than 10% below my fair value, it's hard not to consider this name more closely.

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Crane's Sluggish Growth Guidance And First Quarter Head Fake Won't Help The Shares

Eaton Hitting Its Marks, But Still A Controversial Name

This fourth quarter earnings and guidance season has gone a little better than expected, with many companies having fine-tuned their guidance before the end of 2018 and defanging some of the potential disappointment here in January and February. Even so, there is still a lot of uncertainty regarding the health of the U.S. and global economies, with multiple multi-industrials (including Honeywell (HON), Illinois Tool Works (ITW), and 3M (MMM) ) establishing some rather low numbers for the low end of their 2019 growth outlooks.

I continue to like Eaton (ETN), even if more on a relative, “it’s not that bad” basis. I am definitely concerned about the risk of slowing demand in “general industrial”, trucks, off-road machinery, and non-residential construction, but management’s guidance for the year was fairly encouraging and markets like aerospace and data center are still looking healthy. With skepticism already seemingly built into the valuation, Eaton is a name that could surprise if 2019 proves to be better than expected for the U.S. and global economies.

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Eaton Hitting Its Marks, But Still A Controversial Name

When It Comes To Danaher, 'More Of The Same' Is Usually Pretty Good

With Danaher’s (DHR) strong leverage to life sciences and diagnostics, and recurring revenue, the company is in a good place as the economy goes through its cyclical shifts. Moreover, the company has the luxury to invest for growth without really compromising its core quality, and the balance sheet leaves open the possibility for further growth-driving M&A. The “but” is that the company’s shares are typically richly valued and today is no exception. Although Danaher’s valuation isn’t so unreasonably by the elevated standards of life science tool companies, investors should at least realize they’re paying a premium for Danaher’s perceived quality and cyclical resilience.

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When It Comes To Danaher, 'More Of The Same' Is Usually Pretty Good

Better-Than-Feared Numbers Boost Crane

Crane’s (CR) fourth quarter performance and guidance for 2019 were by no means flawless, but Wall Street is an expectations machine in the short term, and with the shares having sold off about 20% since my last update (underperforming industrials in general), it’s pretty clear that expectations for this conglomerate were deteriorating. I do have some concerns still that management may be too bullish about the prospects for the “general industrial” end-markets in 2019, but healthy chemical, process, and aerospace end-markets should help and I think expectations are at a reasonable level now.

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Better-Than-Feared Numbers Boost Crane

Crane Highlights Its Payment Growth Opportunities, While Fluid Handling End-Markets Improve

Above-average exposure to later-stage markets like aerospace, chemicals, energy, and municipal water is certainly not hurting Crane Co. (NYSE:CR) these days, even though the performance of its Fluid Handling business left something to be desired in the second quarter. I thought I saw some value in Crane shares when I last wrote about the company after second-quarter earnings, but I didn’t foresee the 12% jump the shares have delivered in such a relatively short time.

Management’s recent Investor Day focused on the Payment and Merchandising Technologies (or PMT) business certainly won’t hurt sentiment, as management laid out some good arguments for above-average growth. What’s more, Crane’s valve business (the bulk of Fluid Handling) should see improving results as companies like Emerson Electric (NYSE:EMR) continue to report healthy demand from key process automation end-markets like oil/gas, chemicals, and so on. I don’t find the valuation particularly cheap now, but the company’s market exposures should give it a better-than-peers chance of beat-and-raise quarters for a little while yet.

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Crane Highlights Its Payment Growth Opportunities, While Fluid Handling End-Markets Improve

Amid A Lot Of Mixed Signals, Crane Seems To Offer Some Value

Crane (CR) has always been a bit of an odd duck. While there are plenty of multi-industrials out there, Crane’s $3 billion revenue base and $5 billion market cap makes it a small player among the conglomerates and one with a fairly unusual (albeit very diverse) mix of end-markets. It’s also not especially widely-followed, with only about a half-dozen sell-side analysts covering it and less than 75% institutional ownership. Now add in some odd trends and market signals, and this is a somewhat challenging story to evaluate.

I didn’t like Crane’s valuation back in February of this year, and the shares have underperformed the broader industrial group since then (as well as the S&P 500) with a roughly 10% decline. Now, though, there seems to be growing momentum in the Fluid Handling and Aero businesses, and margins seem to be coming along a little better than expected. If Crane’s late-cycle exposure bears it out as a late bloomer, this could now be a time to consider the shares.

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Amid A Lot Of Mixed Signals, Crane Seems To Offer Some Value

Crane Seeing A Choppier Recovery

Crane (CR) has always been a little different relative to its multi-industrial peers, so I can't say that I'm all that surprised that this company's recovery has followed a different trajectory. Not that this has done the share price any harm - Crane shares are up about 100% over the past two years, better than Parker-Hannifin (PH), Dover (DOV), Emerson (EMR), and many other peers that have seen sharper boom/bust cycles.

While the recent Crane & Co. ("Crane Currency") acquisition should pay off well over time, the near-term outlook for Crane is relatively tepid, with the company expecting decent (but not market/segment-leading) growth across its businesses in 2018 and not a lot of margin leverage. Some investors may find that Crane shares still make sense on a relative value basis, but I'm not inclined to chase these shares.

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Crane Seeing A Choppier Recovery

Seeking Alpha: Despite Soft Orders, Crane Looking For Market Recoveries In 2014

Like so many other industrial names, Crane (CR) ended up having a pretty good 2013 from a stock performance perspective. Orders weakened around mid-year, leading to three straight book-to-bills below 1.0, but the Street stayed optimistic on the prospect for better sales in 2014, and the benefits to be had from the MEI acquisition. Not unlike many other companies with exposure to fluid handling and aerospace, Crane doesn't jump out as cheap based upon trailing ratios, though the cash flow picture is a little more encouraging.

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Despite Soft Orders, Crane Looking For Market Recoveries In 2014

Seeking Alpha: Crane Needs To Reach For Better Performance

What do vending machines, pumps, fiberglass RV panels, and airplane brakes have in common? If you answered "huh?" you win - Crane's (CR) many and varied businesses don't always fit together in the most seamless fashion, and the company hasn't really been a model of shareholder value accretion over the years. That said, this is a company with strong market share in many of its businesses and what looks like a renewed focus on margins. Although today's share price doesn't leap out as a bargain, better execution on the new plan(s) could offer some upside.

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Crane Needs To Reach For Better Performance