A month has gone by since the last earnings report for Crane (CR). Shares have lost about 6.9% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Crane due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.
Crane Beats on Q4 Earnings, Hikes Quarterly Dividend
Crane kept its earnings streak alive in the fourth quarter of 2018, pulling off positive earnings surprise of 6.5%. This is the company's 13th consecutive quarter of recording impressive results.
Adjusted earnings in the reported quarter were $1.64 per share, surpassing the Zacks Consensus Estimate of $1.54. The adjusted figure includes 8 cents of discrete tax benefit, excluding which adjusted earnings were 1.58.
On a year-over-year basis, the bottom line of $1.64 increased 39.6%, driven by sales growth and margin improvement.
For 2018, Crane's adjusted earnings were $5.99 per share, up 1.7% from the Zacks Consensus Estimate of $5.89. On a year-over-year basis, the bottom line increased 32.2% from $4.53 in 2017.
Revenues Gains From Organic Growth and Acquisitions
Crane's net sales were $839.7 million in the quarter under review, reflecting growth of 17.6% from the year-ago quarter. The improvement was driven by 16% gain from acquired assets and 4% organic sales growth, partially offset by 2% adverse impact of foreign currency translations.
However, the top line lagged the Zacks Consensus Estimate of $863.2 million by 2.7%.
The company reports net sales under four segments — Fluid Handling, Payment & Merchandising Technologies, Aerospace & Electronics, and Engineered Materials. The segmental information is briefly discussed below:
Revenues from the Fluid Handling segment were $279.7 million, reflecting growth of 2.8% from the year-ago tally. Results were driven by 6% gain from organic sales growth, offset by 3% impact of forex woes. Further, divestitures adversely impacted results. This segment's order backlog was $279.6 million in the reported quarter, reflecting a decline from $297.7 million reported in the last reported quarter.
Revenues from Payment & Merchandising Technologies totaled $312.8 million, increasing 60.9% year over year. Improvement was primarily driven by synergistic gains from buyouts and 7% core sales growth. However, unfavorable movements in foreign currencies had negative 4% impact. Order backlog at the end of the reported quarter was $331.5 million, down 7.7% sequentially.
Revenues from the Aerospace & Electronics segment were $196.5 million, increasing 6.3% year over year. The improvement was mainly driven by core sales growth. Order backlog at the end of the quarter under review was $446.6 million, up 0.3% sequentially.
Revenues from the Engineered Materials segment decreased 19.1% year over year to $50.7 million due to weak business in the recreational vehicle end market. Order backlog at the end of the reported quarter was $14.9 million, up 44.7% sequentially.
For 2018, the company's net sales were $3,345.5 million, up 20.1% year over year. The top line, however, lagged the Zacks Consensus Estimate of $3.37 billion.
Operating Margin Improves Y/Y
In the fourth quarter, Crane's cost of sales grew 19.5% year over year to $544.6 million. It represented 64.9% of net sales compared with 63.8% in the year-ago quarter. Selling, general and administrative expenses increased 11.2% year over year to $170.9 million. It represented 20.4% of net sales versus 21.5% in the year-ago quarter.
Adjusted operating income in the quarter under review increased 19.5% year over year to $129.8 million. Moreover, adjusted operating margin increased 30 basis points to 15.5%.
Balance Sheet and Cash Flow
Exiting the fourth quarter, Crane had cash and cash equivalents of $343.4 million, up 6.1% from $323.6 million at the end of the last reported quarter. Long-term debt balance inched up 0.4% sequentially to $941.3 million. Notably, the company raised $13.1 million from issuance of long-term debts in the fourth quarter while repaid $1.4 million debts.
In the fourth quarter, the company generated net cash of $191.4 million from operating activities, reflecting growth of 33.5% from the year-ago quarter. Capital expenditure was $33.2 million, above $14.7 million in the fourth quarter of 2017. Free cash flow in the quarter increased 22.9% year over year to $158.2 million.
In 2018, Crane used $83.5 million for paying dividends, with roughly $20.8 million distributed in the fourth quarter. Also, shares worth $50.1 million were reacquired in the year, of which roughly $25.1 million buyback activity was carried in the fourth quarter.
In the quarters ahead, Crane is likely to benefit from growth investments, the Crane Currency buyout (integration on track), repositioning initiatives and focus on the development of products.
The company anticipates adjusted earnings per share of $6.25-$6.45 in 2019, reflecting year-over-year growth of 6% at the mid-point. The projection excludes integration costs related to acquired assets of 7 cents and repositioning costs of 13 cents. By 2021, the company intends on generating earnings of $7.50-$8.00 per share.
Revenues for the year will likely be $3,290 million, down roughly 2% from 2018. Core sales will likely decline 2% to grow 1% in the year while forex woes will represent a 1.5% headwind. However, core sales, excluding impacts of two important projects in Payment & Merchandising Technologies, will likely grow in a low- to mid-single digit.
Operating cash flow in the year is anticipated to be $425-$455 million and capital expenditure is expected to be $90 million. Free cash flow is projected to be $335-$365 million.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates.
Currently, Crane has a poor Growth Score of F, however its Momentum Score is doing a lot better with a B. Following the exact same course, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Crane has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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