Crane's great comeback

Unfortunately, it isn't, although after a major restructure we did view the company favourably back in issue 41/Nov 99 (Accumulate - $8.40). Sadly, the restructure didn't deliver the long-term results the company expected and, as is so often the case, it embarked on another restructure in 2000.

Impressed

By issue 89/Oct 01 (Sell - $6.90) we'd had enough. Manufacturing pipes and selling products to plumbers at a decent margin appeared way beyond the capability of this management team. Then came the latest full-year result.

We have to admit we were surprised. Net profit jumped a massive 270% to $33.6m and the share price is now trading at $8.35. Does that mean management has finally hit upon a winning formula?

We doubt it. That fact is that Crane is not a growth stock but a cyclical one, as a quick glance at the earnings per share figures for the past five years reveals. When the housing and construction sector is firing, it looks like a growth stock but when it's not, it's moribund.

The current residential housing boom and the demand for metal and plumbing that that has produced, has been great for business. We suspect this won't last. And when it ends, so will Crane's dream run.

Cyclical

The company, to its credit, realises the nature of the problem. This is a cyclical business and there's not much you can do about it, except smooth out the bumps by increasing your margins, in good times and bad.

Throughout its divisions the company is generally number one or two in the market so the potential to consolidate, and make bigger margins as a result, is there for the taking. That's why Crane took over Master Trade (a distributor of electrical and plumbing supplies) in New Zealand and is now looking at the metal extrusion business of MCK Pacific.

It may well work but the health of the industry is what drives Crane's profits. Despite the fact that the company generates good operating cash flows, which helps it to pay a fully franked dividend yield of 6%, only once in the past five years has Crane managed to get a return on equity figure over 10%.

Building boom

The building boom will come to an end sometime, though. And, in our view, it will be sooner rather than later. With a history of poor returns on equity, a PER of 12, the saving grace for this company is a price-to-book ratio. It's just above one.

When a stock earns a fully-franked dividend of 6% we'd normally get excited. In fact, this stock looks quite cheap on many measures.

That's enough for us to upgrade our previous recommendation but with the expectation of a faltering building boom and lacklustre management we're only comfortable with a HOLD FOR YIELD recommendation.