Crane

Crane's second-quarter adjusted EPS of $1.79 came in $0.12 above the FactSet consensus estimate. Core sales increased by 5.2% from the prior-year period, driven by 13.3% growth in aerospace and advanced technologies, which was partially offset by a 1.4% decline in process flow technologies.

Why it matters: Management raised its full-year adjusted EPS guidance range by $0.20 on both ends to $6.85-$7.05, which reflects solid second-quarter results as well as growth in the backlog. Aerospace and advanced technologies core backlog increased by 11% year over year to $1.27 billion. Growth in the segment has been broad-based, with strength in both commercial aerospace and defense end markets. Process flow technologies core backlog was down 2% year over year but improved sequentially for the second consecutive quarter, and management is confident that the segment can return to positive year-over-year growth in the second half of 2026.

The bottom line: We've raised our fair value estimate for wide-moat-rated Crane to $192 per share from $185, driven by the firm's strong second-quarter results, improved near-term outlook, and time value of money. We see the name as fairly valued at current levels. Crane expanded its second-quarter adjusted operating margin by 180 basis points year over year to 21.3%, driven by pricing, productivity, and cost management. Management said that all four recent acquisitions are tracking above initial expectations. Crane ended the quarter with a net debt to EBITDA ratio of around 1.2 times, well below the target range of 2-3 times, giving management flexibility to deploy capital into further acquisitions.

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Following Crane's second-quarter earnings, we raised our fair value estimate to $192 per share from $185, driven by the firm's strong second-quarter results, raised near-term guidance, and time value of money. Management raised its full-year adjusted EPS guidance range by $0.20 on both ends to $6.85-$7.05, which reflects solid second-quarter results as well as growth in the backlog.

In the long term, we project average annual organic sales growth in the midsingle digits in process flow technologies and high single digits in aerospace and advanced technologies. We forecast an average annual organic revenue growth rate for the firm of approximately 6% through 2030. Furthermore, we project that average operating margins will improve to above 21%. We expect this operating margin expansion to be driven by volume leverage, cost reductions, productivity initiatives, and mix shift. For our midcycle assumption, we model a roughly 22% operating margin. We assume about an 8.2% weighted average cost of capital and a 23% long-run effective tax rate in our model.

We assign Crane a Morningstar economic moat rating of wide. The firm’s portfolio consists of two strategic platforms: aerospace and advanced technologies, and process flow technologies. Both of Crane’s strategic platforms benefit from 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 the decades, Crane has established long-lasting customer relationships and built a large installed base of equipment that generates recurring revenue, with nearly 45% of sales coming from aftermarket parts and services. While we view the process flow technologies segment as a narrow-moat business, we believe that the aerospace and advanced technologies segment has a wide moat given the long-term duration of contracts that is typical in the aerospace end market, resulting in an overall wide moat rating for the company.

Aerospace and advanced technologies is Crane’s most profitable segment, and we believe it has carved a wide moat. The cornerstones of Crane’s moat in the segment are intangible assets, as a reputation for quality and reliability is imperative to win business in the aerospace end market because of the inherent high cost of failure. For example, Crane manufactures sensors and landing gear that play an essential role in aircraft safety. Considering that ultimately human lives are at stake, suppliers are held to the highest standards. Furthermore, the aerospace and advanced technologies segment differentiates itself by offering highly engineered solutions designed to operate in harsh environments, such as its DC-DC power converters used in NASA’s Mars Perseverance rover.

The aerospace business has high barriers to entry due to the long-term nature of business relationships. For example, after winning a contract, Crane might go through a five-year development program for a new aircraft, which will then typically run for around 20 years. Even after the end of a run, the aircraft will often continue to generate aftermarket sales for another 20 years. As such, Crane can provide OEM and aftermarket products for over 40 years on a typical program in the commercial aerospace business. Thanks to its strong record and decades of experience in the business, Crane enjoys strong relationships with all major original equipment manufacturers, including Boeing, Airbus, Bombardier, and Comac. Crane’s antiskid brake control systems have been used in all of Boeing’s commercial aircraft that are currently in operation.

Aftermarket sales, which account for roughly 35% of sales in the segment, generate a relatively stable and high-margin stream of recurring revenue that helps shield the firm from cyclicality. We view the aerospace and advanced technologies segment’s moat as wide as we believe that it would be difficult for rivals to displace Crane, considering the firm’s multidecade relationships with key OEMs, large installed base of equipment, and wins on new programs.

We believe that the process flow technologies segment has established a narrow moat based on intangible assets, including its engineering capabilities and reputation for quality, as well as customer switching costs associated with its large installed base of equipment.

Process flow technologies manufactures pumps, valves, and sensing solutions that often perform a mission-critical function and are used in applications that require high reliability (for example, valves used in the wastewater, chemical, and pharmaceutical end markets). Crane manufactures highly engineered products designed to operate in harsh environments, handle corrosive or abrasive substances, offer superior energy efficiency, and minimize unplanned downtime.

Customers are often risk-averse and tend to stick with the incumbent supplier because reliability and safety are paramount, and any product failures could result in costly downtime. These considerations drive long-term customer attachment, so Crane’s large installed base drives a resilient and high-margin aftermarket revenue stream, which accounts for roughly half of the process flow technologies segment’s sales.

Crane owns a portfolio of moatworthy businesses that enjoy leading share in niche end markets.

We think the aerospace and advanced technologies segment has established a wide moat based on customer switching costs and intangible assets.

Crane has transformed its process flow technologies portfolio toward higher-margin and faster-growing end markets.

We expect the company to continue to pursue strategic acquisitions, and poor execution of its M&A strategy could destroy shareholder value.

Cost inflation, tariffs, and persistent strength in the US dollar could have an adverse impact on the firm's profitability.

Following the separation, Crane is a smaller company; this might constrain its ability to pursue acquisitions.