Crane Earnings: Process Flow Technologies Segment Delivers Record Margins

We’ve increased our fair value estimate for narrow-moat Crane CR to $85 from $83 after the company reported strong first-quarter results, featuring a 27% year-over-year increase in adjusted operating profit. The fair value adjustment reflects our slightly more optimistic revenue growth and operating margin projections as well as time value of money. We view the stock as modestly undervalued, with shares currently trading in 4-star territory.

Crane grew its first-quarter core sales by 8.4% from the prior-year period. Aerospace and electronics core sales were up 14.8% as the segment continued to benefit from a cyclical recovery in the commercial aerospace end market, though supply chain challenges remain a constraint. Process flow technologies core sales increased by 9.7%, with broad-based growth across the segment. Last, engineered materials core sales declined by 11.5% due to a decline in the recreational vehicle end market.

Crane expanded its adjusted operating margin by 460 basis points year over year, from 13.9% to 18.5%. We were especially encouraged by the stellar 710-basis-point adjusted operating margin expansion in process flow technologies, from 16.3% to 23.4%, as new product introductions have been accretive to the segment’s margins.

After a strong start to the year, management raised its outlook for full-year 2023 and now anticipates core sales growth of 4%-6% (up from 3%-5%) and adjusted EPS of $3.60-$3.90 (up from $3.40-$3.70). Looking beyond 2023, we believe that Crane is poised to deliver strong core revenue growth and margin expansion over the next few years. Furthermore, the company ended the quarter with around $1 billion in merger and acquisition capacity, which should give management flexibility to actively pursue acquisitions to grow its two core platforms.