We issued an updated research report on Kennametal Inc. (KMT) on May 16, 2014. The company reported improved year-over-year results for the third quarter of fiscal 2014 (ended Mar 31, 2014). Adjusted earnings per share increased roughly 14% to 74 cents from the year-ago quarter, while revenues recorded a 15% year-over-year hike to roughly $755.2 million. The enhanced results were driven by organic as well as inorganic growth.
Kennametal has been actively pursuing acquisitions in order to expand its businesses. A strong balance sheet with a significant cash position of $162 million helps it to do the same. In Nov 2013, the company acquired the tungsten materials business which added $340 million to its annual revenue stream and 1,175 employees to its portfolio. In the fiscal third-quarter 2014, acquisitions contributed an impressive 12% to total revenues.
Another key highlight for the company is its diversified business model, which reduces customer concentration risks. Also, over the long term, the company aims at achieving an organic growth rate of 6−10% (Compound Annual Growth Rate – CAGR), earnings before interest and tax (EBIT) to be greater than or equal to 15%, earnings per share to grow within 15−20% (CAGR), capital expenditures to be 3−4% of sales and free cash flow to be greater than or equal to net income.
Additionally, the company seeks to enhance shareholder returns through regular dividend payouts as well as share repurchases. The annualized dividend rate has grown 33% from 48 cents in fiscal 2009 to 64 cents in fiscal 2013.
However, a decline in governmental orders is hampering the company results. In fiscal third-quarter 2014, Industrial segment revenues generated from the aerospace and defense industry suffered due to lower governmental orders. Defense orders are anticipated to remain weak in fiscal 2014.
Moreover, Kennametal’s overseas operations expose it to foreign currency fluctuation risks which lowered revenues by 1% in fiscal third-quarter 2014. With the company’s geographical expansion, adverse foreign currency translation will continue to affect results.
With a market capitalization of $3.6 billion, Kennametal currently holds a Zacks Rank #3 (Hold). Some better-ranked stocks worth considering in the industry include Gorman-Rupp Co. (GRC), Illinois Tool Works Inc. (ITW) and Blount International Inc. (BLT). While Gorman-Rupp sports a Zacks Rank #1 (Strong Buy), both Illinois Tool Works and Blount International hold a Zacks Rank #2 (Buy).
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