Contrary to popular belief, the amount of paper currency in circulation has been increasing in certain years. Global banknotes in circulation have increased from almost $200 billion in 2013 to $321 billion 2021. This has been driven by global uncertainties, including natural disasters, inflation driving increased demand for high-value denominations and demand for cash during the Covid-19 pandemic.
A company that has taken advantage of that trend is Crane NXT Co. (CXT, Financial), a technology company that deals with paper currency security. Recently separated from Crane Co. (CR, Financial), the industrial technology company provides advanced solutions to secure, detect and authenticate what currency and other financial transactions. The company is a pioneer in advanced micro-optics technology for securing physical products. Its sophisticated electronic equipment and associated software utilizes proprietary core technologies with detection and sensing solutions.
The Stamford, Connecticut-based company has approximately 4,000 employees and currently has a market capitalization of $3 billion.
Business segments
Crant NXT operates two distinct business units, Crane Currency and Crane Payment Innovations. The currency unit has been the sole supplier of U.S. paper currency since 1879 and is also involved in international currency with design and security technology solutions. The segment also provides product authentication through micro-optic technologies as well as anti-counterfeit solutions meant to replace old technologies such as holograms. The CPI segment manufactures currency, coin and credit card payment devices as well as self-service retail devices, including self-checkout and vending devices. The company also produces back-office cash processing equipment for financial service companies and casinos.
Across both segments, the addressable market is believed to be approximately $28 billion. The currency design, technology and printing market is approximately $3 billion, while markets the CPI business operates in is expected to reach $4 billion. Adjacent markets in which the company does not currently operate in exceeds $20 billion in value.
Financial review
In May, the company reported first-quarter results on a “carve-out” basis, as the official separation from Crane occurred after the quarter ended on April 3.
Organic sales growth was 3% and the backlog grew 34%. Adjusted earnings per share were 97 cents and the adjusted operating margin was 23.30%. Results from each segment were very different.
For the CPI segment, revenue increase 6% to $224 million, driven by 10% core sales growth and partially offset by 4% negative foreign exchange effects. The operating profit margin was 27.6% compared to 23.2% last year, primarily reflecting strong pricing and productivity. The adjusted operating profit margin was 30.1% compared to 25.9% in the prior year.
In the currency segment, sales decreased 13% to $105 million, driven by a 10% organic sales decline and a 3% impact from foreign exchange effects. The operating profit margin was 16.70% as compared to 28.90% last year, driven by the impact of lower volume and unfavorable mix. The adjusted operating profit margin was 20.10%, down from 31.90% in the prior year.
As of April 4, Crane NXT held cash of approximately $270 million, which reflected approximately $80 million in cash that was transferred as part of the separation. Total debt was $891 million. With expected Ebitda in the mid-$300 million range for 2023, the company’s leverage ratio is not excessive.
In a statement, CEO Aaron Saak said:
"Our first quarter revenue and operating profit was stronger than anticipated, with 10% core sales growth at Crane Payment Innovations accompanied by significant margin expansion driven by our focus on continuous improvement through deployment of the Crane Business System (CBS). Crane Currency's results were in line with our forecast and guidance, driven by timing of shipments through the balance of 2023. The strong orders and backlog growth in Crane Currency in the quarter supports our expectations of accelerating sales and margin expansion as the year progresses. As a result of our strong first quarter results, we are raising the midpoint of our adjusted EPS guidance range by $0.10 to a range of $3.75-$4.05."
Valuation
Crane NXT recently revised its full-year 2023 adjusted earnings per share guidance to between $3.75 and $4.05, an increase from the prior range of $3.65 to $3.95, primarily driven by strong first-quarter results. Based on the midpoint of adjusted guidance, the stock is selling at 13.5 times this year's earnings.
The GuruFocus discounted cash flow calculator creates a value of approximately $70 when using $3.90 as the earnings per share starting point and a long-term earnings growth rate of 10%. The company has long-term goals of mid-single digit revenue growth and operating margins in the high 20% range. Free cash flow conversion rates are expected to be approximately 100%.
The company currently pays an annualized dividend of 56 cents, which equates to a dividend yield of about 1%. The payout ratio is very low, which leaves significant upside for dividend increases.
Guru trades
Gurus who have purchased Crane shares recently include Chuck Royce (Trades, Portfolio) and Keeley-Teton Advisors LLC. An investor who has reduced his position is Steven Cohen (Trades, Portfolio). However, these trades reflect activity as of March 31, which was before the separation occurred.
Summary
With a rich history of operating excellence that dates back many decades, this somewhat new company appears to be undervalued and on the cusp of solid profitable growth going forward.
Spinoffs and separations often create more focused and dynamic companies, and Crane NXT may be following this path.
