Crane: Launching Coverage With Narrow Moat

We launch coverage of Crane CR, following its separation from Crane NXT, with a narrow moat rating and an $83 fair value estimate.

We believe that Crane has built a narrow moat based on customer switching costs and intangible assets. Given that many of its products are used in mission-critical applications where the margin for error is slim (for instance, wastewater pumps or brake control systems used on airplanes), Crane’s reputation for quality and reliability is a key source of competitive advantage. Over decades, Crane has established long-lasting customer relationships and built a large installed base of equipment that generates recurring revenue, with roughly 40% of the firm’s sales coming from aftermarket parts and services.

We expect the company to deliver long-term core sales growth in the midsingle digits, including high-single-digit growth in the aerospace & electronics segment. We believe that aerospace & electronics is poised to capitalize on a continued cyclical recovery in commercial aerospace, as the end market remains below pre-COVID-19 peak levels. We also think that process flow technologies will benefit from new product introductions as well as a portfolio shift toward higher growth end markets, including pharma, wastewater, and industrial automation.

Following the separation, Crane’s net leverage ratio will be roughly 0.5 times pro forma EBITDA, positioning the firm well to continue investing in organic and inorganic growth opportunities. We expect Crane’s capital allocation to focus primarily on M&A to grow the aerospace & electronics and process flow technologies platforms. Management’s long-term vision includes reaching around $4 billion in sales and mid-20s segment EBITDA margins in 2028, compared with around $1.8 billion in sales and a roughly 20.5% segment EBITDA margin expected in 2023.