This Could Be The Trough For Crane

Summary

• CR's quarterly revenue fell 13% Y/Y. Aerospace & Electronics fell the hardest, down 29%.
• EBITDA fell over 35% as the decline in scale hurt margins. Cost containment efforts could help stabilize EBITDA this year.
• Management believes the business may have hit a trough, and will improve as the economy slowly reopens.
• CR is up 75% Y/Y, so the upside in the stock may have occurred already. I rate CR a hold.
• This idea was discussed in more depth with members of my private investing community, Shocking The Street. Learn More »

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The pandemic practically brought business activity to a halt. Shelter-in-place policies caused millions of consumers to be stuck at home. Any shopping that took place occurred mainly online. With millions of Americans working from home, the use of office buildings declined. The need for more commercial buildings could soon be called into question. Industrial production may not return to normal until the economy reopens. That could hurt Crane's (NYSE:CR) business prospects.

In its most recent quarter, Crane reported revenue of $726.4 million, down 13% Y/Y. Each of the company's major product segments reported revenue declines.

Revenue from Fluid Handling was $258 million, down 7% Y/Y. The segment benefited from an acquisition, which provided 5% sales growth, yet not enough to offset declines in organic revenue. The backlog for Fluid Handling was $313 million, up from $267 million in the year earlier period. The backlog could help sustain the segment over time as the economy reopens. Payment Processing reported revenue of $283 million, down 10% Y/Y. The segment experienced a 25% decline in core sales, slightly offset by a 14% benefit from acquisitions. Crane Payment Innovations ("CPI") expects to generate future growth from the retail industry and the trend toward self checkout. Payment Systems was Crane's largest segment at 39% of total revenue.

Aerospace & Electronics revenue fell 29% to $143 million. After-market sales fell hard on a 54% decline in commercial aftermarket and an 8% decline in military aftermarket sales. Sales to the military could remain sticky if the Biden administration maintains military spending at levels similar to that of the previous administration. Commercial sales will likely be driven by global passenger demand, which was in free fall when the pandemic materialized early last year. According to Boston Consulting Group travel may not return to 2019 levels until 2022 or 2023. That implies Aerospace & Electronics could be the last segment to rebound.

Margins Fell

The decline in scale hurt margins during the quarter, which was not unexpected. Operating income margins fell hard for Payment & Merchandising and Aerospace & Electronics. Payment & Merchandising operating profit was $32 million, down 40% Y/Y. Operating profit margins for the segment fell 600 basis points to 11%. The quarter may have included noise from the Cummins acquisition, which occurred last year. Operating income for Aerospace & Electronics fell 29% Y/Y, while operating income margin declined to 9% from 24% in the year earlier period. The sharp decline highlighted the out-sized impact COVID-19 had on the commercial aerospace market. The most recent quarter could be a trough for the segment's decline in revenue and margins.

The fallout was that EBITDA of $87 million was down over 35% Y/Y. EBITDA margin was 12%, down about 500 basis points. Management wrung out over $100 million of cost savings last year, which may have kept EBITDA from falling further during the quarter:

First, we knew we needed to act quickly on cost reductions, given the 2020 demand outlook, and we delivered $105 million of gross cost savings last year, an impressive figure for our cost base, particularly since we intentionally didn't execute on most actions until May. The second decision was that we would pursue those cost actions while continuing all key strategic growth investments at pre-COVID levels and without any material schedule impact. We're emphatic that we continue the investments that will help drive growth for many years ahead. We were extremely careful and disciplined as we made choices about where to reduce costs.

Pfizer (PFE), Moderna (MRNA) and others have received Emergency Use Authorization for a COVID-19 vaccine and have created a pathway to reopening the economy. If this really is the trough, then management's cost containment efforts could potentially help stabilize EBITDA in the second half of the year.

Ample Liquidity

Cyclical names like Crane need to maintain ample liquidity to survive the vagaries of the global economy. Secondly, recessionary pressures could last longer than anticipated. Crane ended the year with $551 million in cash, up from $394 million in the year earlier period. Working capital was $517 million, down from $583 million in the year earlier period. Working capital appears robust enough to support the company for several quarters. Free cash flow ("FCF") for the year was $88 million, down from over $200 million in the year earlier period.

Management was able to deliver positive FCF, despite the free fall in operating income. The ability to monetize working capital as the business retrenched paid off for Crane. Positive cash flow portends liquidity could grow over time. This is important. The company should grow liquidity to support the business in case (1) the economy turns down in the future or (2) the knock-on effects of COVID-19 last longer than expected. Consumer spending was aided by government stimulus checks at the end of 2020. Sans more stimulus, consumer could tighten the purse strings, which would not be good for the economy or Crane.

Conclusion

As the economy slowly reopens, Crane's industrial operations should improve. Aerospace and Electronics may not fully rebound for another year or two. CR is up 75% Y/Y. The upside in the stock may have occurred already. I rate CR a hold.

Analyst’s Disclosure: I am/we are short MRNA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.