Why Is Crane (CR) Up 38% Since Last Earnings Report?

A month has gone by since the last earnings report for Crane (CR). Shares have added about 38% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Crane due for a pullback? 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 Q3 Earnings & Revenues Surpass Estimates, Down Y/Y

Crane reported better-than-expected third-quarter 2020 results. Its earnings and sales surpassed the Zacks Consensus Estimate by 28.1% and 9.4%, respectively.

Adjusted earnings in the reported quarter were $1.05 per share, beating the consensus estimate of 82 cents. On a year-over-year basis, the bottom line declined 25% from $1.40 due to lower sales.

Revenues

In the quarter under review, Crane’s net sales were $734.8 million, reflecting a decline of 4.9% from the year-ago quarter. Results were adversely impacted by a fall in core sales of $104 million largely due to the coronavirus outbreak-led issues, partially offset by foreign exchange of $10 million, and a benefit of $57 million from acquisitions.

Crane’s net sales beat the Zacks Consensus Estimate of $672 million.

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 were $252 million, down 8.7% from the year-ago quarter. Results reflected a 15.3% decline in core sales, partially offset by benefits of 1% from foreign exchange and 5% from acquisitions. The segment’s order backlog was $304.8 million in the reported quarter, reflecting a sequential increase of 2.1%.

Revenues from Payment & Merchandising Technologies totaled $277 million, increasing 11.2% year over year. Results were driven by a 17% benefit from acquisitions and 2% from foreign exchange, partially offset by a core sales decline of 7.8%. Order backlog at the end of the quarter was $270.1 million, down 5.4% sequentially.

Revenues from the Aerospace & Electronics were $157 million, declining 20.4% year over year. The fall was mainly attributable to a decline in core sales. Order backlog at the end of the third quarter was $498.1 million, down 1.5% sequentially.

Revenues from the Engineered Materials declined 4% year over year to $48 million on lower sales to building products market. Core sales declined 3.6%. However, it was partially offset by higher sales to recreational vehicle customers. Order backlog at the end of the quarter was $11.1 million, up 9.9% sequentially.

Lower Operating Margin

In the third quarter, Crane’s cost of sales decreased 2.9% year over year to $480 million. It represented 65.3% of net sales compared with 64% in the year-ago quarter. Selling, general and administrative expenses inched up 0.8% to $169.9 million. It represented 23.1% of net sales compared with 21.8% a year ago.

Operating income in the third quarter decreased 22% year over year to $85 million. Moreover, adjusted operating margin contracted 240 basis points to 12.4%.

Balance Sheet and Cash Flow

Exiting the third quarter, Crane had cash and cash equivalents of $544.6 million, down 8% from $592.1 million at the end of the last reported quarter. Long-term debt balance was marginally up sequentially to $842.7 million.

In the first nine months of 2020, the company generated net cash of $208.1 million from operating activities compared with $171 million in the year-ago comparable period. Capital expenditure in the same period was $20.6 million, down 59.5%.

In the third quarter, free cash flow was $124.4 million compared with $103.7 million in the year-ago quarter. In the quarter, Crane used $25 million for paying dividends, whereas it distributed $23.4 million a year ago.

Outlook

For 2020, the company currently anticipates adjusted earnings per share of $3.75-$4.00 compared with $3.30-$4.10 projected earlier. Sales are predicted to be $2,900-$2,950 million, suggesting year-over-year core sales decline of nearly 17-19%. Free cash flow is projected to be $230-$260 million for 2020 compared with the previous outlook of $200-$250 million.

How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended downward during the past month.

VGM Scores

Currently, Crane has an average Growth Score of C, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of this revision indicates a downward shift. Notably, Crane has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.

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