We issued an updated research report on Crane Co.CR on Jan 8. A well diversified business portfolio, synergistic benefits from acquired assets and priorities of rewarding shareholders handsomely will prove advantageous for the company. However, headwinds related to regulatory compliances, industry competition and segmental weakness might restrict its growth momentum in the near term.
Crane currently carries a Zacks Rank #3 (Hold). Its market capitalization is approximately $5.4 billion.
The company's financial performance was better than expected in the last four quarters, with an average positive earnings surprise of 3.40%. The stock's Zacks Consensus Estimate is currently pegged at $5.00 for 2018, representing growth of 1 cent from the tally 60 days ago.
Also, market sentiments have been positive with the stock yielding 13.1% return in the last three months. This gain is above 0.3% decline of the industry it belongs to.
Below we briefly discuss the company's potential growth drivers and possible headwinds.
Factors Favoring Crane
Business Diversification a Boon: Crane serves customers in various end markets like aerospace, electronics, hydrocarbon processing, petrochemical, chemical, power generation, automated merchandising, transportation and other markets. Such diversification prevents the company from losses in the event of loss of business from any particular customer. Furthermore, international diversity has played a major role in Crane's profitability over time. The company primarily operates in North America, South America, Europe, the Middle East, Asia and Australia.
The company businesses are carried out through four reportable segments - Fluid Handling, Payment & Merchandising Technologies, Aerospace & Electronics and Engineered Materials. The company anticipates increase in demand for productivity solutions in Payment & Merchandising Technologies segment, high growth programs in Aerospace & Electronics, recovering of orders in Fluid Handling and strengthening of end markets in Engineered Materials in the long run. Average organic growth will be at least 2-4% for Fluid Handling, 3-5% for Payment & Merchandising Technologies, 3-5% for Aerospace & Electronics, and equal to GDP growth for Engineered Materials.
Inorganic Initiatives Drive Growth Opportunities: Acquired assets have over time helped Crane leverage benefits from easy penetration into unexplored markets and expanded product offerings. In this regard, the acquisition of Westlock Controls - specializing in manufacturing and distribution of switchboxes, position transmitters and other solutions for use in networking, monitoring and controlling process valves - in May is worth mentioning.
In addition, in December, it agreed to acquire Crane Currency, which designs and manufactures secure and highly-engineered banknotes as well as engages in substrates manufacturing and providing advanced micro-optic security technology to its customers. This buyout, when completed, will strengthen the company's foothold in the currency and payments market as well as add roughly 15 cents to earnings per share in the first year post completion. This accretion is projected to increase to $1 by 2021. Further, the company believes that this transaction will enable it to grow its earnings per share by more than 10% in the years ahead.
Shareholders' Return and Promising Guidance: Share buybacks and dividend payments are the prime means of returning value to shareholders for Crane. In the first nine months of 2017, the company paid dividends totaling $58.8 million and repurchased shares worth $25 million. Over the long term, the company targets achieving a total payout ratio of 40-50%.
For 2017, Crane anticipates adjusted earnings guidance to be $4.45-$4.55 per share. It predicts 2018 earnings, excluding the impact of Crane Currency buyout, to be within the $4.85-$5.05 per share range. Core sales are estimated to increase in the 2-4% range.
Over the long run, the company aims at achieving 10% average annual earnings per share growth. Free cash flow conversion will likely be 100% or more of net income.
Factors Working Against Crane
Poor Valuation & Fourth-Quarter Weakness: On a P/E (TTM) basis, Crane's shares look overvalued compared with the industry with respective tallies of 20.9x and 19.5x in the last three months. Also, the stock is trading above the median of last three-months P/E multiples of 19.3x. This makes us cautious on the stock.
The company predicts sequentially lower sales in Fluid Handling and Payment and Merchandising Technologies segments in the fourth quarter. Also, the ebbing impact of unfavorable foreign currency movements is predicted to be offset by higher commodity and input costs.
Threat From Domestic Compliances and International Expansion: Crane has to comply with many governmental regulations in its homeland, especially in the Aerospace & Electronics and Fluid Handling segments. Any failure to meet the requirements can attract penalties, denting the company's profitability.
In addition, business expansion in foreign nations has exposed it to risks arising from adverse movements in foreign currencies and geo-political issues.
Threat From Industry Competition: Crane faces active competition from other players in the industry due to its wide diversity of products and vastness of the markets it serves. Difficulties or delays in research & development or production and services, apart from failure of new products and technologies in the market, may hurt the company's competitive position.
Some better-ranked stocks in the industry are 3M Company MMM , Carlisle Companies Incorporated CSL and ITT Inc. ITT . All these stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 (Strong Buy) Rank stocks here .
Earnings estimates for 2018 of these three companies have been revised upward in the last 60 days. Also, financial performance of these stocks has been impressive in the last four quarters, with each pulling off a positive earnings surprise.
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