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Will Crane’s M&A Strategy Lead To Further Value Creation?


The post was originally published here.

Highlights:

  • Strategic M&A acquisitions to drive top-line growth
  • Divestiture helps to boost profitability over the long run
  • Accelerated organic growth through higher gov’t budget


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Price remains bullish, volume signal unclear

  • Over the past year, Crane has seen a strong bullish rally
    • The share price has increased by 32% YTD
  • The 50 DMA line has stayed above 200 DMA throughout the whole period, which indicates a bullish signal
  • The RSI-Volume recently crossed the 50%-line which, if continues, would also be a positive sign

Crane’s revenue breakdown 9M21

Strategic M&A acquisitions to drive top-line growth

  • Over the past 10 years, Crane completed 13 significant acquisitions
    • The company plans to free up US$1-2bn for M&A purposes through 2023
  • Besides boosting growth, acquisitions help to keep up with technological trends
    • Crane focused on acquisitions that could be directly merged with its existing entities (also called bolt-on transactions)
    • Therefore, synergies tend to show up quickly

Goodwill comprises majority of its assets

  • Its M&A activities are reflected in its asset base
  • As of 2020, around 42% of its total assets consist of goodwill (31%) and intangible assets (11%)
    • The global average of Industrials companies is goodwill (8%) and intangible assets (6%)

Crane delivered on ROIC; acquisitions seem to pay off

  • In the past, Crane was able to generate a ROIC of around 20%, which is strong
    • Only in 2020, ROIC dropped to 11% which is still in line with WACC
    • I expect the company to be able to return to 20% ROIC in the near-term future
  • Crane might pay a high premium on its acquisitions, but synergies show
    • It claims that synergies turned out to be 2x higher than analysts predicted

Divestiture helps to boost profitability over the long run

  • In 2Q21, Crane divested its “Engineered Materials” segment for US$360m
    • Revenue contribution declined from to 6% in 2020 from 10% in 2016
    • Profitability has fallen by 8ppts over the same period
  • In its new strategic alignment, the company aims to focus on its 3 core competencies
    • It is using divestiture-related funds to expand its highly profitable aerospace segment

Accelerated organic growth through higher gov’t budget

  • The Aerospace & Defense segment is likely to see strong organic growth
    • The primary drivers are a rebound in commercial airline industry and increase in US defense budget
  • This segment plays a critical role in realizing future growth and enhancing profitability
    • Aerospace’s EBIT margin of 20.5% vs. total company’s margin of 15.6% (5-yr avg.)
    • Industry growth: 7-8% CAGR until 2030 expected

FVMR Scorecard – Crane

  • A stock’s attractiveness relative to stocks in that country or region
  • Attractiveness is based on four elements
    • Fundamentals, Valuation, Momentum, and Risk (FVMR)
  • Scale from 1 (Best) to 10 (Worst)

Consensus still sees upside after recent price rally

  • 4 analysts expect the company to outperform while 3 analysts still stay cautious
  • Analysts expect a strong margin expansion in line with the company’s strategy to focus on its highly profitable segments

Get financial statements and assumptions in the full report


P&L – Crane

  • Net profit sees a strong rebound in 21E and could lead to a record
    • The strong bottom-line is mainly driven by the margin expansion, but also strong growth prospects

Balance sheet – Crane

  • Goodwill is the primary asset on the company’s balance sheet
  • Given its past M&A history and relevance for growth generation, I assume further acquisitions to take place over the next years
  • The company recently agreed on resuming its share repurchase program
    • The total confirmed budget of US$300m is spread over the following years

Ratios – Crane

  • Asset base shrinks in 21E due to the divestiture of its 4th segment
    • Beyond 2022, I see a strong asset growth, providing the basis for revenue to grow in a similar direction
  • The margin expansion is also reflected in higher return on assets, which is likely to double in 21E

Long-term share price performance potential

Free cash flow – Crane

  • Strong cash flow generation is crucial for pursuing its M&A strategy

Value estimate – Crane

  • I see a slightly higher revenue growth than consensus
  • Despite acknowledging the recent margin expansion, it will be difficult for Crane to maintain it forever
    • Aerospace and defense segment becomes increasingly competitive
  • My long-term assumptions are relatively optimistic with regards to maintaining high profitability

World Class Benchmarking Scorecard – Crane

  • Identifies a company’s competitive position relative to global peers
  • Combined, composite rank of profitability and growth, called “Profitable Growth”
  • Scale from 1 (Best) to 10 (Worst)

Key risk is intensified competition in local markets

  • Risk of overpaying acquisitions, impairment charges or failure to integrate the business
  • Inability to protect intellectual property or lacking innovative ideas
  • Adverse regulatory changes and environmental liabilities

Conclusions

  • Strong ability to grow organically and through strategic acquisitions
  • Focus on profitable segments could bring ROIC back to 20%
  • Stock trades in line with industry multiples

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