Acquisitions And Operational Improvements Will Strengthen Market Position In Authentication

Key Takeaways

• Strategic acquisitions and operational improvements enhance Crane NXT's market position in authentication and boost potential revenue growth.
  
• Enhanced papermaking and ESG commitments underscore confidence in Crane Currency and responsible business practices, influencing investor perception positively.
  
• Sluggish gaming sector orders, U.S. currency volume decline, and acquisition risks may hinder revenue growth and increase variability in cash flow and margins.

Catalysts

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

• Crane NXT's recent acquisitions, including De La Rue Authentication Solutions and Tru Tag's Smart Packaging technology, are expected to expand their portfolio in the growing $3 billion authentication market, potentially boosting future revenues and market share.
  
• The integration of OpSec is on track, improving operational efficiencies and potentially enhancing net margins through the Crane Business System, while also broadening customer engagement in authentication technologies.
  
• The increase in sales by approximately 14% year-over-year, with a significant growth in international currency and Security and Authentication Technologies, suggests strong sales momentum, which could positively influence future earnings.
  
• The upgrade of papermaking equipment in preparation for the new U.S. banknotes indicates long-term confidence in the Crane Currency segment, potentially stabilizing and increasing future revenues despite recent U.S. Federal Reserve order volume reductions.
  
• The published ESG report and ongoing commitment to governance, sustainability, and philanthropy reflect an emphasis on responsible business practices, potentially improving investor perception and aiding in long-term revenue growth.

Crane NXT Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Crane NXT's revenue will grow by 22.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 12.2% today to 13.1% in 3 years time.
• Analysts expect earnings to reach $348.2 million (and earnings per share of $5.68) by about December 2027, up from $176.0 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 17.1x on those 2027 earnings, down from 18.7x today. This future PE is lower than the current PE for the US Electronic industry at 25.8x.
• Analysts expect the number of shares outstanding to grow by 2.34% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.65%, as per the Simply Wall St company report.

Crane NXT Future Earnings Per Share Growth

Risks

• The company's financials may be impacted by the sluggish order rates in the gaming sector, a high-margin business, which could lead to lowered growth expectations and affect revenue generation in the near term.
  
• The anticipated decline in volume for U.S. currency orders by the Federal Reserve in 2025, combined with an unfavorable mix skewed towards lower denominations, poses risks to revenue and margin pressures from a significant customer.
  
• Non-recurring, project-based nature of the currency business may cause fluctuations in cash flow, impacting free cash flow conversion and resulting in variability quarter-to-quarter.
  
• The firm's integration of acquired companies like OpSec and the expected De La Rue acquisition add risks associated with acquisition synergies, potential integration challenges, and an expectation for these to offset operational dilutions, potentially impacting future margins and earnings if not realized.
  
• The current geopolitical and environmental uncertainties, such as the impact of hurricanes and global events, have the potential to disrupt their supply chains and operations, thereby impacting revenues and net margins.

Valuation

• The analysts have a consensus price target of $78.17 for Crane NXT 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 $100.0, and the most bearish reporting a price target of just $62.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $2.7 billion, earnings will come to $348.2 million, and it would be trading on a PE ratio of 17.1x, assuming you use a discount rate of 7.7%.
• Given the current share price of $57.58, the analyst's price target of $78.17 is 26.3% 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.