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Crane Co: Buy The Balance Sheet

Jul. 23, 2020 8:50 AM ETCrane Company (CR)
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  • Crane has a fortress balance sheet with ample cash and reasonable debt.
  • Shares are undervalued based on free cash flow.
  • The dividend is easily covered by revenue.

Crane (CR) is an established business that has a strong balance sheet to weather the COVID-19 pandemic. With reasonable debt and ample cash, the stock looks like a buy as it trades at a low multiple and pays a hearty dividend.

(Source: Crane Co)

2020 will certainly be a tough year for Crane. The firm has suspended their guidance and management's best estimates see revenue falling ~20%. However, it's important to note that unlike many other firms, Crane will be cash flow positive. Management’s EPS estimate of $2.35-3.60 leaves enough cash to both cover the dividend and interest payments. Because of this, it’s confusing why the stock has been beaten down so heavily. The stock crashed 57% from its highs before staging a recovery that has lagged both the S&P 500 and Russell 2000. Crane trades at an assets to equity ratio of 3, indicating the firm is financially healthy. Furthermore, at the current price of ~$60, shares are trading at an extremely low multiple on free cash flow, only 8.5x. That is less than half the sector median, and below all competitors, suggesting the stock may have some room to run and catch up to these valuations.

(Source: Meta-Chart)

Crane possesses a fortress balance sheet with a low amount of debt. The firm’s debt maturities are very well staggered, with only $150 million due in 2020, and no more due until 2023. In addition, Crane has made the smart move of saving cash for a rainy day like the COVID-19 pandemic: the firm has $549 million in cash and an additional $262 million available through a revolving credit facility. Crane has leverage of ~.22, furthermore showcasing the health of the balance sheet.

(Source: Crane 2020 Q1 10-Q)

Because of Crane’s extremely healthy balance sheet, the firm has plenty of options for more bearish scenarios where the COVID-19 pandemic continues to wreak havoc on the global economy and Crane’s businesses. They can take advantage of the revolving credit facility or even take on more leverage, as they currently have very little debt relative to their assets. In a crisis like COVID-19, it's imperative to own businesses that are financially healthy and have options to weather economic shock. Because of not levering up and saving substantial cash for a rainy day, management has plenty of room to operate in this recession

Crane also maintains a very hearty dividend that is easily covered by free cash flow, even as management expects a 20% drop in the second quarter. Currently at $0.43 per share, that represents a roughly ~3% yield. Crane has a solid dividend history, and over the last decade has increased the payout by 10% roughly every two years.

Overall, Crane’s stock is a buy due to a strong balance sheet amidst a global recession. The company's debt and dividend is covered by FCF, has ample cash and isn’t levered up.

Analyst's Disclosure: I am/we are long CR.

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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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