Is the Market Undervaluing Crawford United Corporation?

While doing our daily look around on the InsiderSentiment.com dashboard, we noticed some insider buying in CRAWA that looked interesting. Insiders bought 60,000 shares worth over $1 million on June 14, 2023, while the market price was around $25. Additionally, there has been no insider selling over the past two and a half years. There are not many insider trades at all in CRAWA, as it appears that the infrequent insider buys over the recent few years is relegated to a once-per-year occurrence. Given this recent vote of confidence by the insiders, we decided to take a deeper look into CRAWA to see just how strong this signal could be. In short, we find that our valuation analysis concurs with this insider trading signal as the market seems to be incorporating worst-case assumptions into the current stock price, leaving a potential runway to the upside.

Looking at the history of insider trading in CRAWA, we see that insiders also bought a substantial number of shares in January 2021, when the stock price was around $20. This purchase turned out to be a good call, with the stock jumping up to $35 over the course of the year. Insiders also bought shares in May 2022 at around $23 to 25 a share. This purchase is yet to be profitable. Overall, the insider trading activity here seems to indicate that insider buying and selling is sensitive to the stock price levels.

Background

Crawford United Corp. (CRAWA) trades OTC and serves diverse markets. The Commercial Air Handling unit engages in designing, manufacturing and installing large-scale commercial, institutional, and industrial custom air handling equipment. Its customers are typically in the health care, education, pharmaceutical and industrial manufacturing markets in the United States. This segment also sells to select international markets. The Industrial and Transportation Products segment includes the manufacture of flexible interlocking metal hoses and the distribution of silicone and hydraulic hoses. Given the diversity of its products, customers and geographic distribution, CRAWA would appear to be protected from idiosyncratic shocks that can bedevil many of its competitors.

Stock Price History

CRAWA has more than tripled in price over the past five years, as shown below, going from around $8.00 to over $25.00 in June 2023. The stock is currently on an upward trajectory, having increased more than 15% in 2023.

Valuation

To get a better understanding of CRAWA’s valuation, we conducted a standard discounted cash flow analysis. We begin with a base case analysis, simply assuming that the most recent performance levels will continue to hold in the near future. We use annual data from the 10-K reports. As shown below, annual sales growth in 2022 was 22.6%, COGS, 78.8% of sales, SG&A 13.5% of sales and depreciation and amortization at 3.2% of sales. We take the equity cost of capital at 10%, and the most recent number of outstanding shares at 4 million.

A table showing the recent income statement ratios for CRAWA

For our forecasts, we temper the sales growth rate down to 3% by 2031. The second part of our discounted cash flow analysis uses Gordon’s constant growth model as the terminal value after ten years. We use a conservative growth estimate of 3% sales growth rate in our terminal value estimates. The rest of the ratios for terminal value estimation are simply the same as the 2022 realizations.

A table showing the income statement forecasts of CRAWA for the baseline valuation

Our cash flow forecasts are shown below. To compute fair value per share, we discounted the forecasted cash flows at the 10% cost of equity. Based on this analysis, we estimate the fair value of the stock price to be $42.50, which is about 70% above the recent market price.

A table showing the baseline valuation of CRAWA

To get some sense of the sensitivity of our estimates, we also used an 11% equity cost of capital. This gives us a fair value estimate of $35.65, which is still about 40% above the current stock price.

Sensitivity Analysis and Risk Factors

Next we estimate the worst-case scenario for CRAWA. To achieve this, we set the 2023 sales growth rate at zero. We increase this only slightly over the next ten years. Our terminal value parameters are the same as before. For COGS, R&D and SG&A, we used the highest realized cost parameters over the past five years. Our fair value estimate in this case turned out to be $23.32. This analysis suggests that the market is highly pessimistic about CRAWA. Interestingly, the current valuation of $25 a share seems to be aligned with almost the worst-case scenario assumptions.

A table showing the worst-case scenario valuation of CRAWA

Most Recent Quarterly Financials

Next, we incorporated into the valuation the most recent information from 2023Q1 financials. Sales for the quarter ended March 31, 2023 (“current quarter”) increased to $39.5 million, an increase of approximately $8.5 million, or 27.4% from sales of $31.0 million during the same quarter of the prior year. This increase is faster than the YoY growth rate of 22.6%. Hence, if anything the growth rate has accelerated during the current quarter.

Cost of sales for the current quarter was $29.0 million compared to $24.6 million for the same quarter of the prior year, an increase of $4.3 million or 17.6%, which is directly attributable to the sales increase. This figure is lower than the 21.2% at the end of 2022. Thus, CRAWA seems to be taking advantage of economies of scale and reducing its COGS. Gross margin was 26.6% in the current quarter compared to 20.5% for the same quarter of the prior year.

Selling, general and administrative expenses (SG&A) in the current quarter were $5.4 million, or 13.7% of sales, compared to $5.0 million, or 16.0% of sales, in the same quarter of last year. Selling, general and administrative expenses were decreased as a percentage of sales, while costs remained flat. Once again, this points to improving efficiencies.

Net income in the current quarter was $3.4 million, or $0.97 per diluted share, as compared to net income of $1.1 million, or $0.31 per diluted share, for the same quarter of the prior year.

Based on the most recent 10-Q, we accelerated the sales growth to 27%. We assume that the 2023 sales growth will continue at this 27% rate. Once again, we moderate this growth rate down to 3% over the next ten years. Even though cost of goods sold and SG&A declined in the most recent quarter, we kept the rest of the assumptions the same as the realized end of year 2022 estimates to be on the conservative side. Based on this one change alone, fair value jumps to $51.74, which is about 100% above the current stock price. This analysis suggests that there is potentially 100% or greater upside for CRAWA.

A table showing a valuation for CRAWA using most recent financials

Rating Agencies

Others seem to agree with our assessment. Zachs Equity Research gives CRAWA a rank of 1 (Strong Buy) and an “A” for value. CRAWA also compares favorably relative to its competitors: CRAWA has a P/E ratio of 8.8 compared to industry average of 17.6. Similarly, CRAWA has a P/S ratio of 0.64 while the industry average is 1.72. Insiders seem to agree that CRAWA is offering good value at this time.

Conclusions

Insider buying at CRAWA seems to indicate a good vote of confidence in the stock. Technical indicators and stock price momentum is favorable. Valuations also seem favorable. Risk factors seem like they are already baked into the price. Overall, CRAWA seems to offer good value for long-term investors at this time.

Authors’ disclosure: This article expresses the authors’ opinions. None of the authors have any business relationship with the company whose stock is mentioned in this article. None of the authors have any stock or derivative position in the company mentioned in this article, nor any plan to open such a position within 72 hours. The article does not constitute any recommendation or advice as to whether any investment is suitable for any particular investor. Consult with your licensed financial advisor before making any investment decision.