Strong Aerospace Demand And M&A Activity Will Boost Future Prospects

Key Takeaways

• Anticipated earnings growth is driven by strong demand and strategic inventory management, enhancing post-strike recovery and boosting sales margins.
  
• Major market approval and potential acquisitions could lead to increased revenue, improved margins, and enhanced shareholder returns.
  
• Natural disasters, strikes, and supply chain issues pose significant short-term risks to revenue and profitability, with economic downturns threatening future market demand.

Catalysts

Manufactures and sells engineered industrial products in the United States, Canada, the United Kingdom, Continental Europe, and internationally.

• Crane is anticipating significant future earnings growth, driven by strong demand in Aerospace & Electronics, which has led to record backlog levels and robust order growth, potentially boosting revenue and earnings.
  
• The company is strategically enhancing its inventory management to support Boeing, positioning itself for a stronger post-strike recovery, which could increase sales and operating margins.
  
• Crane's cryogenics business has been opened to a larger market segment by a major approval, potentially leading to increased revenue and improved margins in Process Flow Technologies.
  
• Future M&A activity is expected, with a strong pipeline already in place, which could lead to increased revenue streams and enhanced profitability through strategic acquisitions.
  
• The company's disciplined capital deployment, backed by substantial financial flexibility, suggests potential future enhancements to shareholder returns and EPS growth.

Crane Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Crane's revenue will grow by 4.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 11.6% today to 16.6% in 3 years time.
• Analysts expect earnings to reach $431.8 million (and earnings per share of $7.33) by about December 2027, up from $263.1 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 29.0x on those 2027 earnings, down from 34.7x today. This future PE is greater than the current PE for the US Machinery industry at 23.6x.
• Analysts expect the number of shares outstanding to grow by 0.98% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.82%, as per the Simply Wall St company report.

Crane Future Earnings Per Share Growth

Risks

• The impact of hurricanes and natural disasters, such as the flooding at Crane's Marion facility and the typhoon in Taiwan, could disrupt operations, leading to potential revenue and profit losses. Although insurance is expected to cover business interruptions, delays in recovery could affect earnings in the short term.
  
• The Boeing strike presents a risk to Crane's Aerospace & Electronics segment, despite management's belief that the overall impact is not material; prolonged disruptions could slow down sales and hurt revenue and margins.
  
• Supply chain constraints, highlighted particularly in the Aerospace & Electronics sector, could impact Crane’s ability to meet demand, leading to potential revenue shortfalls and margin pressures.
  
• The focus on strategic stockpiling and inventory buffers to manage supply disruptions for key clients like Boeing could increase working capital requirements, affecting free cash flow and operational efficiency.
  
• Economic downturns or geopolitical tensions could dampen demand in key markets such as chemicals and aerospace, impacting future revenue growth and profit margins, especially if they lead to project delays or reduced spending in critical sectors.

Valuation

• The analysts have a consensus price target of $177.0 for Crane based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $200.0, and the most bearish reporting a price target of just $143.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $2.6 billion, earnings will come to $431.8 million, and it would be trading on a PE ratio of 29.0x, assuming you use a discount rate of 6.8%.
• Given the current share price of $159.67, the analyst's price target of $177.0 is 9.8% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.