Acquisitions Integration And Facility Upgrades Will Expand Authentication Capabilities

Key Takeaways

• Heavy investment in acquisitions and upgrades may compress margins short-term but aims to enhance long-term security and authentication capabilities.
  
• Strategic acquisitions bolster offerings but increase leverage and margin pressure; variability in cash flow expected due to shipment timing.
  
• Declining U.S. currency volumes, gaming sector softness, and potential trade tensions may pressure Crane NXT's revenue and margins in 2025.

Catalysts

Operates as an industrial technology company that provides technology solutions to secure, detect, and authenticate customers’ important assets.

• Crane NXT is investing heavily in the integration of acquisitions such as OpSec and TruTag Smart Packaging, which is expected to dilute operating margins in the short term but should yield synergies and enhanced capabilities in security and authentication technologies over time. This focus on integration may initially compress net margins but aims to strengthen the company’s positioning and profitability.
  
• The planned upgrades to Crane NXT's U.S. currency production facilities in preparation for the launch of the new U.S. bank notes are expected to result in a significant temporary decline in revenue from U.S. currency sales in 2025 due to production shutdowns. However, once complete, these upgrades are anticipated to drive future revenue growth as new banknote designs enter production in 2026.
  
• The company's strong backlog in international currency, driven by winning new currency denominations with its micro-optics technology, provides confidence in maintaining revenue levels. Nonetheless, the timing of shipments and collections may lead to variability in free cash flow, as evidenced by recent shifts impacting free cash flow conversion.
  
• Crane NXT continues to engage in strategic acquisitions such as De La Rue Authentication Solutions, slated to close in Q2 2025, which will expand the customer base and product offerings. While the company maintains a robust M&A funnel, these acquisitions initially increase leverage and may pressure net margins until integration and synergies are realized.
  
• The company faces challenges in its CPI segment, specifically with softness in the OEM retail end market and gaming, where customer inventory dynamics and shifting market trends are expected to lead to only low single-digit growth. This could impact overall revenue growth rates, necessitating ongoing productivity initiatives to maintain segment operating margins.

Crane NXT Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Crane NXT compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Crane NXT's revenue will grow by 5.3% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 12.4% today to 17.6% in 3 years time.
• The bearish analysts expect earnings to reach $306.6 million (and earnings per share of $5.21) by about May 2028, up from $184.1 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 11.9x on those 2028 earnings, down from 14.8x today. This future PE is lower than the current PE for the US Electronic industry at 20.0x.
• Analysts expect the number of shares outstanding to grow by 0.19% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.94%, as per the Simply Wall St company report.

Crane NXT Future Earnings Per Share Growth

Risks

• The company has highlighted the 18% expected decline in U.S. currency volumes and unfavorable product mix, which could adversely impact revenue and operating margins in 2025.
  
• There is ongoing softness in the gaming sector, which affects revenue growth, and the anticipated inventory burn-down could persist longer than expected, delaying returns to normal levels of new orders and impacting revenue.
  
• Potential tariff impacts relating to trade tensions with China, Mexico, and Canada have not been factored into the 2025 guidance, which could lead to unexpected costs and negatively affect net margins if tariffs increase.
  
• The retail end market is experiencing a high single-digit decline due to reduced demand for traditional self-checkout systems, which could pressure overall revenue growth in the CPI segment.
  
• The acquisition of OpSec and its related integration pose the risk of continued margin dilution due to lower prevailing margins in the acquired entity, potentially impacting overall net margins if operating synergies are not realized promptly.

Valuation

• The assumed bearish price target for Crane NXT is $51.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Crane NXT's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $100.0, and the most bearish reporting a price target of just $51.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $1.7 billion, earnings will come to $306.6 million, and it would be trading on a PE ratio of 11.9x, assuming you use a discount rate of 7.9%.
• Given the current share price of $47.64, the bearish analyst price target of $51.0 is 6.6% 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.