The first quarter of the 2024 earnings season has kicked off. This quarter is typically regarded as giving investors the initial pulse of the economy for the rest of the year. It could also be the time for the manufacturing sector to shine. After reporting its quarterly earnings, shares of Crane (NYSE: CR) are up by more than 6.3% for the trading session on April 23.
Crane is looking to ride the remainder of the industrial stocks wave this year. After all, it has outperformed the Industrial Select Sector SPDR Fund (NYSEARCA: XLI) by as much as 65% over the past 12 months.
Considering that the industrials space also outperformed the broader S&P 500 by 5% over the past six months, Crane stock could be the best-performing stock in one of the best-performing sectors. Beyond price action, there are a few other reasons why Crane stock is becoming a Wall Street favorite today.
Not Your Father's Bull Market
In years past, the bull market for U.S. equities tended to be more inclusive, boosting the manufacturing and business services sectors. This time around, the COVID-19 pandemic caused severe economic dislocation.
Because the Federal Reserve (the Fed) needed to lower interest rates near zero to combat a sluggish economy, the two areas of the economy started to behave in opposite ways. Investors can see this divergence live by following the ISM manufacturing PMI index compared to the ISM services PMI index.
However, after contracting for over a year, manufacturing is starting to take off. Analysts at The Goldman Sachs Group Inc. (NYSE: GS) expressed this breakout in their 2024 macro outlook report a few months ago, and so far, they are right.
On the other hand, services have slowed down its expansion pace in the past quarter, a sign of changing times. With stocks like Netflix Inc. (NASDAQ: NFLX) selling off by as much as 15% after reporting first-quarter 2024 earnings, as opposed to Crane's near double-digit rally, investors can see this divergence at play.
This divergence stems from the Fed's proposed interest rate cuts for 2024, which could weaken the dollar, making American exports more attractive to foreign buyers.
February's manufacturing PMI showed a 6.4% jump in export orders for the U.S., proving this thesis right thus far. The macro picture is set, but why choose Crane stock?
It's a Wall Street Favorite so Far
Two things typically drive stock prices: Earnings growth and how markets feel about these earnings projections. Compared to the industrial sector's expected 10% earnings per share (EPS) growth, Crane's 8.9% may be a conservative bet.
There must be a reason why markets value this stock at a 50.6% premium to aerospace and defense competitor Lockheed Martin Co. (NYSE: LMT). On a forward price-to-earnings ratio (P/E) basis, Crane's 24.5x multiple shows a market willingness to pay over Lockheed's 16.3x valuation.
Lockheed stock analysts think the company will grow its EPS by 8% this year, on par with Crane's. Despite being the smaller company, with only a $7.8 billion market capitalization compared to Lockheed's $111 billion, Wall Street analysts think these two could achieve the same growth rate.
Now, for the reason behind Wall Street's willingness to pay. It seems to be all about future sales and sales quality for Crane, as markets specifically pay a 125% premium for its sales versus Lockheed's. A price-to-sales (P/S) ratio of 3.6x places expectations for Crane's revenue above Lockheed's 1.6x
Crane's First Quarter: Investor Bullseye
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In the first quarter of the 2024 earnings release, management mentioned Crane's signed agreement to acquire CryoWorks. This acquisition is expected to add about $28 million in annual sales to the company, which is why the P/S ratio is richer.
Over the year, EPS grew by 14.3% before the macro manufacturing tailwinds and the CryoWorks acquisition. Investors may wonder whether today's EPS projections reflect the company's financial future.
With geopolitical tensions rising, Crane's exposure to defense equipment may be of interest to investors, as management has raised 2024 guidance. Sales growth is now set to 10% (8% previously), and EPS guidance has also been raised by $0.20.
By raising their price targets to $150 a share from $135, analysts at Stifel Nicolaus now see a net 8.7% upside in Crane stock. Bank of America Co. (NYSE: BAC) also saw it fit to boost its targets from $110 to $140. Wall Street's favoritism could go beyond price action this time around.
