Krones (KRN) A Quiet Compounder

1. BUSINESS OVERVIEW – KRONES AG (Ticker: KRN)

What does the company do?

Krones designs and manufactures machinery and complete production lines for bottling, packaging, and beverage production. It also provides intralogistics and IT solutions for factory automation.

Business Segments:

Filling & Packaging: PET and glass bottling lines, labeling, and packaging. Process

Technology: Beverage production equipment including brewing systems.

Intralogistics: Robotics, warehouse automation, and software systems.

Lifecycle Services: Recurring revenue from maintenance and retrofitting.

Industry Context:

Serves large global beverage and FMCG firms. Positioned for growth through sustainability, digital factory automation, and emerging market expansion.

Key Competitors: Sidel (Tetra Laval), KHS (Salzgitter), GEA Group. Tailwinds: Demand for eco-friendly packaging and PET recycling. Automation and digitalization trends. Global beverage consumption growth.

Headwinds:

Rising input costs.

Capex sensitivity of client base.

Emerging market competition.

2. FINANCIALS

2.1 Revenue & Profitability Trends

• 2024 Revenue: €5.29B (+12.1%)

• EBITDA: €537.1M, EBITDA margin: 10.1%

• EBT: €381.6M, EBT margin: 7.2%

• EPS: €8.77 (+23.3%)

• ROCE: 18.2%

Weighted Average Cost of Capital (WACC) = 7.8% Krones AG's 2024 Return on Equity (ROE) is approximately 18.2%, while its estimated Weighted Average Cost of Capital (WACC) is around 7.8%.

Interpretation:

• ROE (18.2%) > WACC (7.8%)

• The spread between ROE and WACC is approximately 10.4 percentage points.

This significant positive spread implies that Krones is creating substantial value for shareholders, it is earning much more on each euro of equity than it costs to raise that capital.

This is a key indicator of:

• Strong capital allocation

• Competitive advantages (moat)

• Potential for long-term compounding

This kind of value creation is exactly what Buffett, Munger, and Klarman seek in high-quality businesses.

2.2 Earnings Consistency

Krones has shown remarkable post-COVID recovery, with EBT margins steadily improving from 1.1% in 2019 to 7.2% in 2024. A renewed focus on operational efficiency and cost control is visible in margin expansion.

2.3 Owner’s Earnings Estimate

Net Income (€277M) + D&A (estimated €160M) – CapEx (€181M) is approx €256M

Represents consistent free cash generation with reinvestment capacity.

3. INTRINSIC VALUE – BUFFETT STYLE DCF

PE Ratio: 14.29

3.1 Relative Valuation

Trading below major peers like GEA (25×) and Bilfinger (19×). Below Dürr (24.36×). Above Jungheinrich, which trades at a lower valuation (11.64×), likely due to slower growth or different sub-sector focus. Valuation cushion: At 14–15× earnings, Krones appears modestly undervalued relative to peers, which enhances its margin of safety.

3.2 P/E vs. Growth:

Krones offers robust historical EPS growth (25 % CAGR), aligning it nearer to high-growth peers yet priced more reasonably.

3.3 FCF Payback Period

Krones AG's Free Cash Flow (FCF) payback period is approximately 14.05 years. This means it would take just over 14 years for an investor to recoup their initial investment from current FCF levels, assuming steady cash generation and no reinvestment. This is reasonable for a stable industrial compounder, though not particularly short.

3.4 Buffet Style Valuation Assumptions:

• Owner’s Earnings (base): €256M

• Growth: 6% per year

• Discount Rate: 10%

• Terminal multiple: 15× Intrinsic Value Estimate:

• 10-Year PV of Earnings: €2.06B

• Terminal Value (discounted): €2.84B

• Total Intrinsic Value: €4.90B

• Market Cap (July 2025): €4.11B

Upside: Based on an intrinsic value estimate of €4.90 billion and a current market capitalization of €4.11 billion, Krones AG (KRN) offers an approximate upside of 19.2%.

4. COMPETITIVE ADVANTAGE (MOAT)

1. Switching Costs: Integrated solutions are costly and time-intensive to replace.

2. Global Footprint: Strong emerging market presence.

3. Brand & Customer Trust: Trusted partner of Coca-Cola, AB InBev, Nestlé, etc.

4. Recurring Revenues: High-margin lifecycle services.

5. Sustainability Edge: In-house PET recycling solutions. ROCE and EBITDA margin trends confirm moat durability.

5. MANAGEMENT QUALITY

Insider Ownership: Not prominently disclosed; institutional shareholding dominates.

Capital Allocation: Disciplined investments in R&D and strategic M&A (Netstal). Growing dividends and rising CapEx are aligned with strategic goals.

Shareholder Return:

• 2024 Dividend: €2.60 (+18.2%)

• Free cash flow used for both reinvestment and shareholder returns.

6. RISKS

• Macroeconomic Sensitivity: Client budgets tied to global capex cycles.

• Talent Shortage: Difficulty attracting engineers globally.

• Emerging Market Competitors: Low-cost players may pressure margins.

• Execution Risk: Integration of Netstal and global expansion.

  
  

7. SCUTTLEBUTT & QUALITATIVE CHECKS

Customer Loyalty: Long-term relationships with global FMCG leaders.

Employee Base: 20,379 employees with consistent headcount growth.

Market Sentiment: Low analyst coverage, under-the-radar stock.

8. CONCLUSION – INVESTMENT THESIS FOR KRONES

Why It’s Compelling: Steady industrial compounder with global diversification. Trading at a modest valuation (14.29× earnings). Strong balance sheet and expanding margins. Secular tailwinds in sustainability and automation. Ideal "punch card" stock for long-term ownership.

Would I Hold for 10+ Years? Yes. Krones exemplifies a classic value opportunity: a strong business, improving economics, and long-term tailwinds, trading at a fair price. It’s a rare blend of quality, consistency, and undervaluation.

Disclaimer: This content is intended for informational and educational purposes only and should not be considered investment advice. Always conduct your own due diligence before making any financial decisions.