Crane Is Strengthening its Market Position
Awais is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In the rapidly changing world that we live in today, speed is everything. For this very reason, mergers and acquisitions are taking the upward trend while organic growth is focused on at a lower level. Companies are willing to pay a higher cost for ready made businesses in order to save the time it takes to either enter a market or penetrate deeper. Recently, Crane (NYSE: CR) acquired privately held MEI Conlux Holdings to widen its base in making machines that can handle money through automated mechanisms.
The details of the acquisition
This acquisition strengthens the company’s niche market leadership as MEI is a manufacturer of electronic bill acceptors, coin mechanisms and other unattended transaction systems. As MEI is a leader in the payment solutions industry with a solid product portfolio, Crane expects this deal to substantially fortify the company's existing payment solutions business.
This is the third acquisition Crane has made since 2006 to enhance this segment. With this acquisition, Crane will now be able to provide a complete product range using MEI's leadership in bill validation and coin handling. Further, it will enhance the company’s ability to innovate and combine bills, coins and cashless payment options to better serve its customers throughout the world. Since both companies operate internationally, Crane will have an opportunity to exploit the key growth areas across the globe, particularly in emerging economies.
Over the past three years, MEI sales have grown at a rate of 13% while its EBITDA margins have increased to 21%. On the other hand, Crane's sales have risen at a rate of 5.5%.
Pre-acquisition, the company was expecting its core sales growth to range between 2% to 4%, with per share earnings to range in between $4.05 and $4.20. Following the acquisition of MEI, Crane is expecting its earnings per share to increase by $0.20 per share to lie in between $4.25 and $4.40. This includes synergies amounting to $0.07 on a per share basis. The synergies are projected to rise to $25 million, or $0.30 per share, on a pre-tax basis every year for the subsequent three years.
The market position of competitors
Precision Castparts (NYSE: PCP), a key operator in the industry, recently made an acquisition. The company has taken over Permaswage SAS, a world leading designer and manufacturer of aerospace fluid fittings.
The acquisition strategically fits the company’s operations. It extends its reach into permanent fittings by developing its market presence in the separable fittings, achieved from the company’s purchase of Airdrome. Permaswage has strong fittings positions on main current and next-generation commercial aircraft platforms. The company holds substantial long term opportunities of profitable growth that Precision can benefit from.
The company is providing a healthy return to its shareholders by generating a return on equity (ttm) of 15.7% as compared to the industry average of 11.5%. The company employs the same amount of leverage as is the industry norm i.e. 40%.
Dover (NYSE: DOV) is another player in this industry. In 2013, the company spun-off certain communication businesses, which it believes can be better run on a standalone basis due to the evolution of its unique business model. Following this spin-off, the company has greater flexibility to concentrate on its growth strategies. This will allow Dover to create significant value for its shareholders. Dover reported its total bookings increased by 7% in the most recent quarter. This resulted in a book-to-bill ratio of 1.09.
The company expects to achieve top-line growth of 7% to 9% with 3%-5% coming from organic growth coupled with acquisition growth of 4%. Earning per share are forecasted to range in between $5.05 and $5.35, as compared to the earnings per share of $4.41 in 2012.
The company recently increased its cash dividends (by 7%) for the 58th consecutive year.
The acquisition by Crane has added immensely to its business solutions segment. Considerable synergies are expected to be materialized from this purchase. Moreover, the company is also slightly undervalued. Its P/E (ttm) stands at 17.8 times as compared to the industry average of 18.3 times, providing a capital return potential of 2.7%. The company is also expected to raise its dividend by 7.4% in 2013. Hence, I would recommend buying this stock for medium term.
Although Precision Castparts is currently providing a very low dividend yield of 0.06%, the company has been able to provide a substantial price return of 43% in the last year. However, Precision has achieved its intrinsic value and may not register such abnormally high price increases. This is also evident from the company’s P/E, which stands at 22.9 as compared to the industry average of 21.6. Hence, I would recommend a sell
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Awais Iqbal has no position in any stocks mentioned. The Motley Fool recommends Precision Castparts. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!