On Dec 15, 2014, we issued an updated research report on Kennametal Inc. (KMT). Despite a solid long-term growth potential, the presence of near-term headwinds weighs on the company’s performance.
Kennametal benefits from a diversified customer base, having derived less than 4% of its total sales from any single customer in 2011−2013. Also, the company engages in strategic acquisitions and dispositions from time to time. This enables the company to manage its portfolio and thus, enhance its business activities.
By fiscal 2017, Kennametal aims at doubling its base business to $5–$6 billion as well as grow earnings per share in the range of 15−20% (Compound Annual Growth Rate – CAGR). Organic revenue growth is expected to range between 6−10%, while free cash flow is anticipated to be greater than or equal to net income. Earnings before interest and tax is expected to be greater than or equal to 15%.
Also, the company estimates to realize $50–$55 million in annual savings through consolidation of operations, reduction in administrative overhead costs and leveraging supply chains. These restructuring activities are expected to be fully implemented by fiscal 2016.
Notwithstanding these positives, near-term risks, coupled with weak outlook for fiscal 2015, have restricted Kennametal’s growth momentum. While the company recorded a 14% year-over-year increase in earnings per share, its revenue grew by 12%. However, a hike in cost of sales partially offset the revenue growth.
For fiscal 2015, Kennametal lowered its sales and earnings forecasts anticipating a weak Eurozone business, declining underground mining production levels and diminishing drilling activities in the oil and gas sector. Disappointing outlook has led to a downward revision in the earnings estimates for the company. Over the last 60 days, the Zacks Consensus Estimate has decreased by 7% to $2.80 for fiscal 2015 and by 7.5% to $3.19 for fiscal 2016.
With a market capitalization of $2.8 billion, Kennametal currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the machinery industry include Blount International Inc. (BLT), Barnes Group Inc. (B) and EnPro Industries, Inc. (NPO). While Blount International sports a Zacks Rank #1 (Strong Buy), both Barnes Group and EnPro Industries hold a Zacks Rank #2 (Buy).
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