OpSec Integration Will Open New Markets With Micro-Optics Technology

Key Takeaways

• Crane NXT's growth through securing new currency denominations and strong international sales backlog may boost revenue in the coming years.
  
• Ongoing M&A activities, including strategic acquisitions, are set to expand product offerings and diversify Crane NXT's portfolio, driving revenue growth.
  
• Persistent market and macroeconomic challenges risk flat revenue, margin pressure, and diluted earnings, complicating growth and integration efforts in core and new segments.

Catalysts

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

• Crane NXT is poised for growth in its Currency business through securing 13 new denominations in 2024 with its security technology, which could enhance revenue due to increased market share and a strong backlog for international sales in 2025.
  
• The successful integration of the OpSec acquisition is enabling Crane NXT to drive commercial synergies, such as entering new markets with micro-optics technology, which will increase recurring revenue and could positively impact earnings.
  
• Strategic investments in upgrading equipment for new U.S. bank notes set to launch in 2026 represent a decade-long growth opportunity, potentially leading to increased U.S. currency sales volumes and positively impacting revenue and margin expansion.
  
• Continued M&A activity, including the anticipated acquisition of De La Rue Authentication Solutions, will expand Crane NXT’s product offerings and customer base, contributing to revenue growth and portfolio diversification.
  
• Expected strong free cash flow generation and a robust M&A pipeline provide financial flexibility for growth investments, possibly enhancing earnings and capital allocation opportunities.

Crane NXT Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Crane NXT's revenue will grow by 26.4% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 12.4% today to 9.5% in 3 years time.
• Analysts expect earnings to reach $284.9 million (and earnings per share of $4.87) by about March 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 analysts price target, the company would need to trade at a PE ratio of 19.6x on those 2028 earnings, up from 17.1x today. This future PE is lower than the current PE for the US Electronic industry at 19.9x.
• 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 8.04%, as per the Simply Wall St company report.

Crane NXT Future Earnings Per Share Growth

Risks

• The company is experiencing continued softness in the gaming market, which could lead to flat or reduced revenue growth in that segment until the second half of 2025. This may impact overall revenue and margins negatively in the short term.
  
• There is significant exposure to macroeconomic factors and federal fiscal decisions, such as tariff changes and Federal Reserve actions, particularly impacting the U.S. currency segment, which could lead to a decrease in sales volume and unfavorable mix impacting net margins.
  
• The retail end market continues to face softness in OEM orders due to retailers considering solutions beyond traditional offerings, which poses a risk to growth and pricing strategies in this segment, potentially impacting overall revenue.
  
• There is a risk associated with the integration and margin improvement in newly acquired businesses like OpSec, which currently contribute lower margins. The expected dilution from OpSec could weigh on overall earnings if integration targets and synergy objectives are not met in a timely manner.
  
• The company's guidance for modest overall sales growth and lower operating profit in Q1 2025 indicates challenges with return on investment in ongoing production upgrades and currency mix issues, possibly affecting earnings stability and shareholder confidence.

Valuation

• The analysts have a consensus price target of $77.833 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 2028, revenues will be $3.0 billion, earnings will come to $284.9 million, and it would be trading on a PE ratio of 19.6x, assuming you use a discount rate of 8.0%.
• Given the current share price of $55.02, the analyst price target of $77.83 is 29.3% 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.