Secure Transactions
In today’s perilous digital age, as cyber threats and fraud mechanisms become increasingly sophisticated, the protection of physical assets, particularly money and payment systems, has taken center stage. More than ever, there’s a pressing need to safeguard transactions and ensure the authenticity of the very currency that powers economies. This challenge extends beyond just digital transactions to the realm of tangible assets, underscoring the immense importance of industrial technology solutions dedicated to securing, detecting, and authenticating these physical products. Serving as a robust shield against counterfeits and malpractices, this industry is pivotal in upholding the integrity of financial systems and maintaining public trust.
Rooted in deep technical prowess, companies in this space deliver innovative solutions – from micro-optic security to intricate detection systems – that guarantee the security of physical transactions and assets. Their offerings come with high entry barriers, often granting leading players unparalleled dominance in their respective markets.
We will present such a company, but first, let us delve into a short update on the economy and markets, and the Smart Investor calendar.
Economy and Markets: Looking Forward
There are several important reports scheduled to be published in the next few days.
- On Thursday, we’ll receive the preliminary estimate for Q3 2023 GDP Growth Annualized. This report, released by the U.S. Bureau of Economic Analysis, will provide an initial glimpse of the U.S. economy’s health in the previous quarter. The third quarter’s economic growth is expected to come in at 4.1%, much stronger than Q2’s 2.1%, as a result of stronger-than-expected gains in exports, consumer spending, and employment.
- On Friday, the U.S. Bureau of Economic Analysis will publish September’s Core Personal Consumption Expenditures (Core PCE). This report reflects the average amount of money consumers spend monthly, excluding seasonally volatile products such as food and energy. FOMC policymakers use the annual Core PCE Price Index as their primary gauge of inflation. A stronger-than-expected reading could portend a possible hawkish shift in the Fed’s forward guidance.
As for the stock calendar, the Q3 2023 earnings season for Smart Investor Portfolio companies is in full swing, with many earnings reports scheduled for the next several days. The reporting companies this week are STMicroelectronics (STM), Terex (TEX), Arista Networks (ANET), Check Point (CHKP), Enterprise Products Partners (EPD), Perion Network (PERI), CDW (CDW), Alamo Group (ALG), and Axcelis Technologies (ACLS).
The ex-dividend date for Enterprise Products Partners (EPD) is scheduled for October 30th.
Today, we are adding the stock of a global leader in technology solutions to securing, detecting, and authenticating physical products. The company we are adding has recently split off from its predecessor but is already showing great results, which are expected to progress going forward.
To make room for this valuable addition, we are letting go of a robust and profitable packaging company, whose stock has been a casualty of America’s obsession with weight loss.
New Addition: Crane NXT (CXT)
Crane NXT, Co. is an industrial technology company that provides technology solutions to secure, detect, and authenticate physical products. Crane NXT offers solutions such as micro-optic security, integrated detection and sensing systems, connectivity solutions, and more; its sophisticated electronic equipment and associated software leverages proprietary core capabilities with detection and sensing technologies.
Crane NXT was established in April 2023 as a result of the split of Crane Holdings, Co. into two separate entities, Crane Company and Crane NXT. Crane Holdings was an American industrial products company, founded in 1855, which served as a holding company with a diverse industrial business portfolio. It operated through four business segments: Aerospace & Electronics, Engineered Materials, Process Flow Technologies, and Payment and Merchandising Technologies.
Upon the separation of the company, Crane Holdings, Co. was renamed “Crane NXT, Co.” and continued to operate the Payment & Merchandising Technologies segment as an industrial technology pure-play, and a market leader in the global payment and currency markets. The remaining three segments were spun off to create a newly established entity, Crane Co. The new entity inherited Crane Holdings’ NYSE ticker, “CR,” while Crane NXT has received a new ticker, “CXT.” Despite the new ticker, Crane NXT and not Crane Co. is the direct successor of Crane Holdings.
Following the separation, Crane NXT has become a mid-cap industrial tech company with a market capitalization of $3.5 billion and a workforce of approximately 4,000 employees. It operates 15 global manufacturing sites and 10 major R&D facilities in the United States, the United Kingdom, Mexico, Japan, Switzerland, Germany, Sweden, and Malta, serving customers in over 60 countries. Crane NXT’s customer base is geographically diversified, with 62% of revenue derived from the U.S., 17% from Emerging Markets, 11% from Europe, and the remaining 7% from the rest of the world.
Crane NXT operates through two main segments: Crane Currency (CC) and Crane Payment Innovations (CPI). The CPI is responsible for 65% of the company’s revenues, while the rest is derived from the CC division’s activities. Both divisions are highly diversified in terms of geographies and end customers.
- Crane Payment Innovations (CPI) division supplies coin, banknote, and credit card payment devices; self-service retail technologies, including self-checkout and vending machines; and back-office cash processing equipment for financial services and gaming. CPI also provides aftermarket services for CPI systems, and software solutions for the improvement of operational efficiency, consumer analytics, and service optimization. In terms of customer diversification, the largest revenue segment of the CPI division, responsible for about 30% of sales, is the vending category; the second largest is the gaming industry with about a quarter of total segment revenue; 20% comes from retail and 18% from financial services. No single customer is responsible for more than 5% of the division’s sales. Key customers of CPI include PepsiCo (PEP), Wells Fargo (WFC), Coca-Cola (KO), Bank of America (BAC), US Connect, GardaWorld, Cubic Corp., Loomis, and more.
- Crane Currency (CC) division is a market leader in proprietary technology that secures and authenticates banknotes; it is a long-term, trusted partner to over 50 central banks, including the Federal Reserve. In fact, CC has been the sole supplier of U.S. currency paper since 1879. In the U.S. and internationally, the division provides currency design, security technology, and paper and banknotes. No customer outside of the U.S. is responsible for more than 7% of the division’s sales. In addition, the CC segment has developed a suite of micro-optic solutions for product authentication and anti-counterfeit security. In the past decade, the number of banknotes globally featuring Crane Currency’s micro-optics has grown at an annualized rate of 18%; in the same period, the division’s sales expanded at a CAGR of 15%.
As a legacy carrier of Crane Holdings’ Payment and Merchandising division, CXT continues to serve existing customers, besides acquiring new clients. Above 70% of CXT’s customers have been with the business for more than 20 years, underscoring the exceptional stickiness of its customer base.
CXT’s main business lines have exceptionally high barriers to entry. In its CC segment, Crane NXT faces virtually no competition. In its CPI segment, the company holds a leading position in all key markets.
Crane NXT’s financial health is solid overall. Within the separation framework, CXT received a $275 million payment from the now-extinct Crane Holdings, which was used to pay back some of the debt, which was proportionally split between the two new entities. CXT’s current debt-to-equity ratio of 98% is still quite high but is expected to continue being steadily reduced. The debt is well-covered by operating cash flow, while interest payments are well-covered by EBIT. A quick ratio of 1.6 and a current ratio of 2.2 indicate a very healthy level of liquidity.
As for capital efficiency, CXT features industry-beating metrics. Its Return on Equity (ROE) of 22.5% and Return on Assets (ROA) of 11.4% are much higher than the industry’s averages. The company’s strong profitability is reflected in its gross margin of 47.8%, operating margin of 24%, and net profit margin of 12.3%, which are much higher than the averages in its industry.
Crane NXT began its operations on solid footing: its very first quarterly results as an independent company (for Q1 2023, published in May) were so strong that the company’s management lifted its full-year outlook. Q2 2023 extended the first quarter’s success, with revenue and EPS exceeding analysts’ estimates by a wide margin. In Q2, CXT reported 6% sales growth year-on-year (compared to the 2022 performance of Crane Holdings’ Payment division), while operating income rose 10%, and EPS came in at $1.12, way above expectations. As a result, CXT’s management lifted full-year 2023 guidance again, lifting the expected EPS range by 3% and adding that the company is well on the path to achieving ~100% free cash flow conversion in 2023. Crane NXT will report Q3 2023 results on November 6th.
CXT is focused on maximizing shareholder return and has a clear long-term capital allocation strategy, targeting 89% of available cash to mergers and acquisitions (M&A), 6% to capital expenditures (CapEx), and 5% to dividend payouts. Crane NXT is carrying on its predecessor’s dividend policy; while its dividend yield of 1.1% is lower than the industry’s average, it’s expected to grow in accordance with the company policy.
Crane NXT’s stock has also begun its independent life on solid footing, delivering a 29% gain since April 1st, 2023. That, compared to the S&P 500’s (SPX) increase of just 3% in the same period.
Despite the outperformance, CXT stock remains very modestly valued compared to its peers in the industry. That is because, after the split-up, the stock began its climb from a very low base. CXT is now trading at a TTM P/E of 14.8 and a Forward P/E of 15.1, representing a 20% discount to the Industrial sector’s average.
Hedge funds and individual investors are very positive towards the stock, steadily increasing their exposure. In addition, judging by the insider activity in recent months, the company’s stakeholders are highly optimistic about its future performance.
TipRanks-scored top analysts share this optimism, as they foresee an average upside of 82% for the stock in the next 12 months. CXT carries a “Perfect 10” Smart Score rating on TipRanks with a “Strong Buy” recommendation:
In conclusion, we believe that Crane NXT, building on its predecessor’s strong business legacy, has a tremendous capacity for growth and a solid policy in place to achieve its growth targets. CXT’s robust finances, modest valuation, bright growth outlook, and strong alignment with shareholder interests, make it a winning combination of value, quality, and growth, and as such, a valuable addition to the Smart Investor portfolio.
New Deletion: Graphic Packaging (GPK)
Graphic Packaging International provides packaging solutions for food, beverage, food service, household, healthcare, and other consumer products. Although GPK is a mid-cap company with a capitalization of $6.2 billion, it is one of the largest producers of folding cartons and fiber-based food service products in the United States and Europe.
The company operates in 18 countries worldwide, but the U.S. is its primary market, accounting for 75% of total sales. GPK’s customers are consumer-facing companies that use its packaging, such as Kellogg (K), Coca-Cola (KO), McDonald’s (MCD), and others.
Apart from its very high debt load – which has been declining in the past year, but still amounts to a 220% debt-to-equity ratio – GPK is a robust company with solid capital efficiency and profitability metrics and healthy margins. It has reported solid growth in earnings in every quarter since Q3 2021; even though its latest report for Q2 2023 featured a miss on EPS, it still rose 10% year-on-year.
Despite its more-than-decent performance, the company’s stock has been tumbling since the summer. It began with the natural profit-taking after GPK reached its all-time high in June; the downfall was further spurred by the EPS miss. However, the largest negative effect on the stock is attributed to the wave of analysts’ downgrades published in recent months.
Analysts from KeyBanc, Deutsche Bank, Citi, Jefferies, and Wells Fargo either cut their price targets on GPK or downgraded it to “Sell,” or both. Although several analysts remain positive on the stock, the overall negative momentum outweighed their voices.
All-in-all, analysts see packaging stocks as indirect victims of Ozempic and other weight-loss drugs, which are expected to depress demand for sweets, snacks, and other packaged foods. While we don’t believe that a rise in weight-loss drug use will substantially impact demand in the next three years, the negative sentiment towards packaged foods producers, as well as their suppliers, reigns supreme. In addition, there are other industry- and company-specific reasons for analysts’ pessimism, such as input and labor inflation depressing margins, food inflation weighing on demand for GPK’s customers’ products, and increased competition from foreign packaging producers targeting the lucrative U.S. market.
While we may see the company overcoming these factors in the future and the stock regaining its posture when the dust settles, for now, we believe it is appropriate to sell the stock.
Charter Members of the 30% Winners Club
*The 30% Winners Club includes stocks from the Smart Investor Portfolio that have risen at least 30% since their purchase dates.
The surge in Treasury yields to their 16-year high has had a strong negative effect on the stock markets in general; this effect has been much more pronounced in rate-sensitive technology stocks.
This, too, shall pass – but for now, our exclusive club’s ranks have shrunk again, now including only GE and AVGO after TECK, ORCL, and CDW fell through the 30% threshold.
Now, these “fallen angels” are the first in line to reenter the Winners Club, as TECK features a 26.9% gain since purchase, while ORCL is now up 26.6%, and CDW is up 26.5%. Will they be able to close these gaps, or will someone else outrun them to the finish line?
What’s Next?
Our next commentary will come out on Wednesday, November 1st, before the market opens.
Until then – we wish you a world of investment success!
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Disclaimer
The information contained in this article represents the views and opinions of the writer only, and not the views or opinions of TipRanks or its affiliates and should be considered for informational purposes only. TipRanks makes no warranties about the completeness, accuracy, or reliability of such information. Nothing in this article should be taken as a recommendation or solicitation to purchase or sell securities. Nothing in the article constitutes legal, professional, investment and/or financial advice and/or takes into account the specific needs and/or requirements of an individual, nor does any information in the article constitute a comprehensive or complete statement of the matters or subject discussed therein. TipRanks and its affiliates disclaim all liability or responsibility with respect to the content of the article, and any action taken upon the information in the article is at your own and sole risk. The link to this article does not constitute an endorsement or recommendation by TipRanks or its affiliates. Past performance is not indicative of future results, prices, or performance.
