Tactical Acquisitions And Innovations Propel Aerospace & Electronics Giant Towards Robust Growth

Key Takeaways

• Strong focus on strategic acquisitions and market expansion, alongside organic growth, promises enhanced operational efficiency and product line diversification.
  
• Emphasis on high-efficiency sectors and new technologies suggests potential for significant margin improvement and revenue growth through innovation.
  
• Crane faces operational and margin challenges due to aerospace OE sales slowdown, supply chain issues, risky acquisitions, and uncertain industrial activity affecting profitability.

Catalysts

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

• Strong strategic growth vision and achievable M&A strategy indicating potential revenue growth through strategic acquisitions and market expansion.
  
• Commitment to organic and inorganic growth strategies to enhance operational efficiency and expand product lines, likely impacting earnings positively.
  
• Impressive 9% core sales growth with significant strength in Aerospace & Electronics and Process Flow Technologies sectors, suggesting potential for continued revenue growth.
  
• Solid backlog increase of 10% compared to the previous year, providing visibility into future earnings and revenue stability.
  
• Focused expansion in high-efficiency and new technology sectors like aerospace's Next Generation Air Dominance program and Process Flow Technologies' new motor platform, indicating potential for margin improvement and revenue growth from new markets and product innovations.

Assumptions

• Analysts are assuming Crane's revenue will grow by 7.3% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 10.9% today to 0.1% in 3 years time.
• Analysts expect earnings to reach $402.4 million (and earnings per share of $6.95) by about August 2027, up from $241.0 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 28.8x on those 2027 earnings, down from 36.5x today. This future PE is greater than the current PE for the US Machinery industry at 21.8x.
• Analysts expect the number of shares outstanding to grow by 0.77% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 6.68%, as per the Simply Wall St company report.

Risks

• The company assumes Aerospace & Electronics commercial Original Equipment (OE) sales growth will be solid but at slightly lower levels due to changes with OE build rates, potentially impacting revenue growth in this segment.
  
• It also anticipates Aerospace & Electronics supply chain issues to continue with only very gradual improvement, suggesting ongoing operational and cost challenges that could affect margins.
  
• Crane highlighted its strong reliance on acquisitions for growth, noting several potential transactions particularly towards the end of 2024 and into 2025. If these acquisitions do not materialize as planned or fail to deliver expected synergies, it could impact the company's growth and profitability.
  
• The company's guidance includes assumptions of muted industrial activity in some regions, which, if more pronounced than expected, could adversely affect sales volume and revenue.
  
• Crane's growth strategy heavily leans on capital deployment opportunities, with significant financial flexibility for M&A activities. There is a risk if the deployment does not achieve expected returns or if market conditions change, impacting the availability of attractive acquisition targets or the cost-effectiveness of these investments, thereby affecting earnings growth potential.

Valuation

• The analysts have a consensus price target of $164.5 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 $178.0, and the most bearish reporting a price target of just $130.0.
  
• 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 $402.4 million, and it would be trading on a PE ratio of 28.8x, assuming you use a discount rate of 6.7%.
  
• Given the current share price of $153.89, the analyst's price target of $164.5 is 6.4% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.