Crane NXT, Co.

Moat: 3/5

Understandability: 3/5

Balance Sheet Health: 4/5

Crane NXT, Co. is a global provider of highly engineered industrial products, operating across several segments such as payment innovations, and security and authentication technologies.

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.

Business Overview

Crane NXT operates as a diversified industrial technology company, split into two main segments: Payment Innovations (CPI) and Security and Authentication Technologies (SAT).

  • Crane Payment Innovations (CPI): This segment is a leader in advanced payment systems, providing cash handling and dispensing products, coin management solutions, and related software to a variety of industries such as gaming, retail, and vending, in multiple countries. CPI solutions involve various cash handling and dispensing technologies including recyclers, acceptors, dispensing equipment, and related services and software.

  • Security and Authentication Technologies (SAT): This segment delivers innovative solutions for protecting physical products, brands, and assets using advanced sensing and authentication technologies. SAT serves multiple markets including brand protection, anti-counterfeiting, and document security for government and industrial clients, primarily in the form of serialized printed products and digital verification technologies.

Revenues:

  • Geographic Distribution: While the company operates globally, North America appears to be a key market for both CPI and SAT, and a sizable portion of revenues come from Europe. Although they have business in Asia, Australia, and Latin America, those regions do not seem to contribute a lot yet.
  • Customer Base: Their customers are mostly other businesses who uses the company’s technology on their products, therefore, the business is less reliant on consumers and more dependent on their business customers.
  • Type of Revenues: Revenue streams are primarily generated through sales of equipment, software licenses, and services. Some service components appear recurring through after market maintenance and service contracts. Also, licensing for their technology seems to provide a stable revenue stream.

Industry Trends and Competitive Landscape

  • Payment Innovations (CPI): There’s a trend toward automation and self-service within the payment industry, creating a strong demand for CPI’s products and services. The digital payment landscape is constantly evolving, presenting both opportunities and challenges. Competition is mainly in areas of cash processing equipment with players such as Glory Global Solutions and others but this segment is often influenced by regulation changes and adoption rates of new payment technologies.
  • Security and Authentication Technologies (SAT): There are rising counterfeiting activities and increasing intellectual property theft problems, this gives strong tailwinds for SAT’s solutions. This segment faces competition from other security and authentication companies that offers similar solutions but also faces competition from counterfeiters that constantly try to outpace it’s technology. However, the company’s expertise, and proprietary technology provide a differentiation in their market. Regulations also play a major role in this industry with some markets mandating or recognizing only specific security methods for their products.

Margins:

  • Overall: Gross margins at 45-55% while operating margin of roughly around 20-25% are high.
  • Margins Fluctuation: The fluctuations of the company’s margins do not seem to be significant. In some quarters, it has gone up due to pricing changes, and on other quarters, it has gone down due to higher material costs and labor expenses. But they seem to have an overall stable margin in their financials.
  • Profitability: While the company’s top line has grown, net profit margins have remained consistently high. Both the CPI and SAT divisions appears to have strong long-term profitability.

What Makes Crane NXT Different

  • Proprietary Technology: Crane NXT has established a strong position in their markets through proprietary technology. There are a lot of complex systems involved in their products, which makes replication hard.
  • Diverse Applications: The company’s diverse range of applications provides them diversification that enables them to be adaptable to various industries.
  • Global Footprint: Having a global footprint allows them to engage with a vast range of customers and to operate internationally.
  • Recurring Revenue Streams: Revenue is sticky, because it is generated via customer subscription and through providing critical components that has to be maintained by the producer of that component. This gives them a recurring and predictable cashflow.
  • Industry Expertise: Decades of operation in their industries have earned the company a reputation and expertise.

Financials In-Depth

  • Revenue: Q1 of 2024, revenue for Payment Innovations was up 3.3%, with organic growth of 2.5% and Security and Authentication Technologies was up 8.1%, with organic growth of 4.8%. For the six months ending on Jun 30, 2024, revenues for Crane Payment Innovations were 3.8% down at 403 million while Security & Authentication Technologies were 6.8% up at 386.5 million from the same period of 2023. Full year revenue 2023 was up 2.9% from 2022. The company is growing, but in somewhat small rates.
  • Profitability: Net income for Q2 2024 was 47.1 million vs 51.8 million from previous year. For the six months ended in Jun 30, 2024, they generated a net income of $79.8 million vs $86.9 million for the same period of 2023. These results were lower than the previous year, but was mentioned to be due to a combination of foreign currency headwinds and temporary timing of expenses. The full year of 2023 showed a net income of 189 million. The company is profitable, but profitability can vary between years.
  • Debt: Debt is relatively low and they maintain a strong credit rating, with long term debt at 440 million.
  • Cash: They have cash and cash equivalents of $725.5 million. These are good ratios that signals healthy balance sheet and that the company can fulfill its future obligations.

Moat Analysis Crane NXT has a narrow moat which has a rating of 3. Moats are sustainable competitive advantages that protect a company from their competitors.

  • Intangible Assets: Intangible assets in the form of know-how, brand reputation, and proprietary manufacturing technology that has formed for the past few decades.
  • Switching Costs: It could be difficult for businesses to switch out a technology that is so interconnected within its other equipment and processes. These are a source of switching costs for customers.
  • Economies of Scale: They leverage their expertise, global operation and strong distribution network for a source of cost advantage.
  • Economies of Scale: By serving a wide range of industries, the company has a broader potential customer base which results in a steady source of income for the company.
    • Why not higher rating: * Technology obsolescence: Disruptive technology change and innovation can make current products or services obsolete and may erode their competitive advantage over time. Competition is fierce, which creates a risk to all of their profits.

Risks to the Moat & Business Resilience

  • Disruptive technology: Technological disruptions and changing market landscapes could change the way they make money, forcing the company to make large changes or make their current assets and tech obsolete.
  • Competition: Intense competition in various sectors could lead to price wars and erode profit margins. There are many players in their industries which could create new methods to compete with the company.
  • Raw Material Costs: Rising raw material costs, or supply chain issues could squeeze profit margins.
  • Economic cycles: Because the company serves several industries, it’s revenues could be volatile and subject to different business cycles. If the company does not prepare for down turns, it could significantly harm it.
  • Dependence on key customers: If the business becomes reliant on one or few major customers, it can be susceptible to losing some if those relationships turn sour.

The company’s resilience is somewhat adequate, though they have multiple factors that help keep the company relevant for a long time: diversified operations, high returns on invested capital, and the expertise the company has built over time. Management must continually work to keep these competitive advantages and also respond well to challenges that may come their way.

Understandability

  • Rating: 3/5
  • Justification: The business operations are somewhat understandable, but valuation still remains complex. The financial statements are complex to analyze. While it’s somewhat easy to grasp their core principles, fully understanding their business model and future implications requires a deep dive into the company’s reports and earnings calls. The variety of their business lines adds a layer of complexity, that may not be readily understandable for an individual without experience.

Balance Sheet Health

  • Rating: 4/5
  • Justification: The company’s balance sheet has reasonable levels of debt, ample cash reserves and is consistent over a period of time. A low current ratio and high leverage could be interpreted as risks but these factors are due to the company’s strategy in the financial sector. The company’s business provides stable enough cashflow for these to be kept in check. Additionally, the management commentary does not give any immediate concerns. The company has a good balance sheet that is well under control.

Recent Concerns / Controversies & Management View

  • Q2 2024 results: Q2 of 2024 showed some weakness that was mainly attributed to poor market conditions, supply chain issues, and foreign exchange headwinds. Management expressed that they are trying to mitigate this through cost reduction, more supply chain partnerships and pricing changes.
  • Guidance: The guidance for 2024 was somewhat reduced due to economic uncertainties, but management still holds high hopes that the business can deliver results in the long term.
  • Acquisitions: The acquisitions made by the company are currently being integrated, but the management acknowledges that those acquisitions may take a longer time to realize synergies and returns on investment, as the company is trying to find the right fit and balance.
  • Spin-off: Management was asked on whether they see the spin-off as a good thing in the latest earnings call. The management defended the spin-off and said that the separation provides different businesses with appropriate management and different capital structures that would make these businesses more efficient and allow for growth.

This report has been prepared by an AI, so you should always take its advice with skepticism and do your own due diligence before making any financial decisions.