Crane Company

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

Crane Company is a manufacturer of highly engineered industrial products, operating across Aerospace & Electronics, Process Flow Technologies, and Engineered Materials segments, with a history of over 150 years.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Crane Co., a company with a rich history, operates in several distinct segments: Aerospace & Electronics, Process Flow Technologies, and Engineered Materials. This structure provides some diversification, but each segment operates in different industries with unique competitive landscapes and growth drivers. This means the overall company’s performance isn’t as predictable as a singular business.

Business Overview

Revenue Distribution

Crane Co.’s revenue is derived from three primary segments:

  • Aerospace & Electronics: This segment, which represented approximately 42% of the company’s sales in Q3 2024, provides critical components and systems for the aerospace industry, including those related to sensing, power, fluid, thermal management, and landing systems. It caters to a variety of commercial and military aircraft platforms.

  • Process Flow Technologies: This segment, contributing around 41% of revenues in Q3 2024, specializes in highly engineered fluid handling equipment for mission-critical applications that require reliable, consistent, and safe operation. These products include valves, pumps, and related solutions, primarily serving the chemical, oil and gas, power, and pharmaceutical sectors.

  • Engineered Materials: It represented 17% of the total revenue in the latest quarter. It manufactures fiberglass-reinforced plastic (FRP) panels and coils that are primarily used in the recreational vehicle, transportation, and building construction markets.

  • Aerospace & Electronics: This sector is witnessing a rebound in demand for both commercial and military aircraft, leading to increased production. However, the industry remains susceptible to supply chain disruptions.
  • Process Flow Technologies: This segment is driven by robust demand in oil and gas, chemicals, and the biopharmaceutical industries. Investments in infrastructure modernization and sustainability create opportunities here, along with some challenges from regulations.
  • Engineered Materials: This industry is dependent on growth in the overall economy and transportation sector, and is seeing some near term slowing of demand.

Margins

  • Gross Margins: Net margins in the company’s 2022 Annual Report were 10.1%, which was much lower than the previous years. In Q3 2024, their operating margins improved to 14.2%. They are focused on improving efficiency and driving profitability through their pricing power and improving operational efficiencies.
  • Operating Margins: Operating margins are currently on a steady up trend, at 14.2%. This shows the ability of the company to control its costs and operate profitably.
  • Financial Leverage: The company is using leverage to enhance profitability, but does not seem to be over-reliant on debt. Their debt-to-capitalization ratio is 15.4%, as of December 31, 2022.

Competitive Landscape

  • Aerospace & Electronics: This market is very competitive with many major players, and requires heavy investments in technology to keep up with innovation.
  • Process Flow Technologies: The market has large established players, however new competitors could come in as they develop new process capabilities, and the barriers of entry here are not extremely high.
  • Engineered Materials: It is a pretty standard industry that has lots of competitors, but there are benefits of low cost manufacturing and specific niche markets.

Crane Co. has consistently emphasized organic growth, margin expansion, and improving its operational efficiency. The company’s management acknowledges they have room for improvement in their sales cycles, and has been working on new programs for efficiency gains, process technology improvements and digitalization.

What Makes the Company Different

  • Diversified Portfolio: The diverse portfolio across multiple segments provides a degree of resilience, as downturns in one segment might be offset by gains in another.
  • Global Presence: Crane has operations in multiple countries that support its broad customer base, and this international experience helps to create a global company with valuable insight.
  • Focus on Value Creation: Management has expressed the need to enhance value by emphasizing both profitability and revenue growth. They are focusing on operational metrics and trying to improve their margins.
  • Separation: Crane completed the separation of its former Payments and Merchandising Technologies segment in 2023 to create Crane NXT, Co., an independent, publicly traded company. This division gives them more clarity of focus and makes it more appealing to investors.

Financial Analysis

  • Solid Balance Sheet: Total assets are more than double total liabilities with a strong current ratio. Their balance sheet shows good liquidity and that they have a strong foundation to take on their future opportunities. Their operating cash flows show good growth, which indicates they can generate their own growth.

  • Total Assets: $3.96 billion (2023-12-31)
  • Total Liabilities: $1.62 billion (2023-12-31)
  • Good Profitability: Crane generates good profits and has improved its operating margin over the years, which shows that the company is focused on improving their profitability.
  • Shareholder Returns: They are returning money to their shareholders with consistent dividend payments that have been growing and have undertaken share buybacks.
  • Debt Management: They have successfully managed to reduce their debt levels. In 2023, they repaid about $170 million in short term and long term debt. This further increased their flexibility and reduced interest expenses in the near future.

In their Q3 2024 earnings call, the management reiterated that they have strong demand across their business, have improved their profitability and are making good progress on their strategy.

Recent Concerns / Controversies

  • Supply chain constraints have been mentioned in multiple earnings calls, and have been impacting the business. However, the management has said that they have been focused on improving supply chain to mitigate the issues.
  • Economic slowdown: There is a risk of slow down in the overall economy, however the management has pointed towards being a very resilient company that has a diverse customer base, which will enable it to perform even during tough times.
  • Geopolitical turmoil: The global landscape has some geopolitical tensions, which could increase volatility in financial markets and may affect their business.

Moat Rating: 2 / 5

Crane Co. has some level of competitive advantage, but doesn’t have a very durable and strong moat. Here is a justification:

  • Narrow Moat: The company’s moat relies primarily on its brand and network, especially within the Process Flow Technologies and Aerospace segments. However, these are not fully immune to disruption and competition.
  • Limited Switching Costs: While they have some switching costs from their customers, those aren’t really significant to maintain their business.
  • No clear Network Effect: Although the business depends on customer networks for business development, it isn’t necessarily a powerful network moat where benefits grow exponentially as more people join their customer base.

Overall, Crane possesses some aspects of a moat, but it doesn’t possess a truly great moat due to their dependence on a variety of niche markets, each with their unique dynamics. Their current moats are more narrow rather than wide and thus could be easily eroded.

Understandability Rating: 3 / 5

Crane’s business model is moderately complex due to its diversification across different segments and industries. Understanding the dynamics of each segment, their respective markets, and the interactions between them requires a comprehensive analysis, thereby requiring some extra time and effort for full comprehension. There is little complexity in any of their businesses, but because their business is diversified, understanding it on the whole can be a little complicated, thus a 3 rating is more applicable.

Balance Sheet Health: 4 / 5

Crane’s balance sheet is relatively healthy, reflecting their ability to manage their debt and maintain a strong financial position. Their solid liquidity and cash flow generation further supports a healthy balance sheet. There is limited risk of financial distress. They have shown improvement in reducing their debt as well, which further improves their health. However, their capital spending is going to be higher in the upcoming years, because they need to improve their infrastructure to support growth, so debt needs to be monitored and managed carefully.

Crane’s business results have been good as of their latest reports, and they have strong cash positions with good liquidity. Management has given positive outlook of their business. Overall, it is a pretty stable and financially strong business at the moment.

Key Takeaways

  • Crane Co. has a good market position in several industries, however lacks true moat.
  • They have shown improvement in revenue and earnings as well as an improved balance sheet.
  • They are actively managing to improve their performance and maintain profitability and have a plan for long term value creation.

Crane is a pretty good business, but you need to factor the geopolitical, industry and economic risks and also their ability to sustain growth into the future. These risks need to be closely monitored to make good decisions about Crane. Also the new spinoff division’s performance also has to be seen and monitored.