Description

Steady end markets, 7.8% free cash flow yield, 20+% operating margins, and trading at a conglomerate discount, Crane NXT (CXT) is the spinoff of Crane (CR) which became effective in April.  We believe that NXT can grow topline 4% and bottomline 10% annually.  Our target for CXT is $71/share, which represents a 16 PE ratio, which is more inline with mid cap industrials, 30% higher than today’s share price.

In April, Crane (CR) spun off the The Payment & Merchandising Technologies segment consisting of Crane Payment Innovations (“CPI”) and Crane Currency. CPI provides electronic equipment and associated software leveraging extensive and proprietary core capabilities with various detection and sensing technologies for applications including payment verification and authentication. CPI also provides automation solutions, field service solutions, and remote diagnostics and productivity enhancing software solutions. Crane Currency is a pioneer in advanced, proprietary micro-optics technology

Crane NXT's Sandbox

NXT has expertise around the globe in protecting currencies, and detection and authentication of payments primarily in automated self service environments. 

Crane Payment and Innovations and Crane Currency both overlap and provide a synergistic effect to the company as a whole.

NXT did an informative investor day in March which does a very good job explaining the business as a whole.  I have taken selected slides from this presentation.

Annual Investor Day (q4cdn.com)

Crane Payment Innovations (CPI)-  68% of Revenue and 74% of Segment Profit

CPI provides electronic equipment such as payment technology, self-checkout solutions, and cash processing.  It also provides the various software and service associated with these products.  It produces payment acceptance products for things like self service checkout kiosks, and vending machines.  Its products are sold into end markets like vending machines, gaming, retail financial services and transportation.  It sells products to OEMs like NCR, Diebold and Toshiba.

Their addressable market in this segment is $4 billion and they are the #1 player.  If you have gone to any convenience store or grocery store, you have probably used their technology when you self check out.  Their competition includes Toshiba and Fujitsu.

CPI’s technology is centered around detecting and verifying currency in transactions.  During COVID and the rise of cryptocurrency it was feared that cash usage would permanently decline.  This has not actually been the case as the slide below shows. 

CPI should continue to benefit from automation trends, and labor saving trends.  Why pay a checker when you can do self service kiosks?  

Crane Currency -  32% of Revenues and 26% of Segment Profit

Crane Currency supplies banknotes to central banks around the world.  It is the market leader and it is the only supplier of US currency for over 100 years.  

While cash transactions may feel like they have declined anecdotally, the amount of banknotes in circulation around the globe continues to grow.

Crane’s customer base is broad and its reputation is strong and there are very high barriers to entry.  Companies in this industry have to have multiple layers of security etc.  

Crane provides design services, specialty currency paper and evolving security technology to help protect counterfeiting.  

Revenues can be lumpy at times as central banks roll out new banknotes at varying schedules.  

Crane has ZERO competition in the US.  and competes against De La Rue and Giesecke and Devrient in foreign markets. 

Growth in the currency segment seems to be in the 4-6% range.  

CXT’s Long Term Model

Crane expects to more than double sales and earnings over the next 5 years.  This will be done by organic growth and acquisitions.  Organically the company could grow earnings about 10% per year, but select acquisitions can take that growth to 15-16% per year over a 5 year period. 

Poised for Growth

2023-2024 Earnings Model

The model below assumes that there are no acquisitions, and are adjusted for one time expenses per management’s guidance, not GAAP.  

As you will notice the Crane Payment Innovations is the larger, faster growing and highest margin segment of the two business segments at the company.  Crane Currency has hit segment margins approaching 30% in the past but we are just modeling low 20’s margin.  

Balance Sheet

Valuation

As mentioned in the introduction, we believe that the stock is worth $71/share based on it getting an average multiple of mid cap industrial stocks.  We believe that overtime however, it has the potential to get a higher multiple than average if it is able to publicly execute its growth in Payment Innovations.  Currently, we see the company generating an 11% return on total assets and 22% ROE.  Its business is not capital intensive, with capex running at just 1-2% of sales exceeding its D&A expense.

We see the valuation moving higher given this return on capital profile, along with execution and better exposure to the investment community.  CXT’s margins are higher than most of the mid cap peers, and I think that will make a difference as it continues to execute.

Current Valuation:

Share Price:  $55

2024 Earnings per share:  4.4

Current PE:  12.5

Target Valuation

$71/ share at 16X earnings per share.

Risks

It is hard to ignore that the company is hugely exposed to the usage of cash and foreign central banks.  With the rise of crypto currency and electronic payments via smart phones, it may appear that the need for their technology will eventually go away.  However, this seems to be not happening or not anytime soon.

Global Economic Decline

Supply Chain 

War

Catalyst

Hitting Guidance this year

Acquisition