We issued an updated research report on Kennametal Inc. KMT on Oct 9, 2015. The company manufactures and supplies high-speed metal cutting tools, tooling systems and wear-resistant parts to clients in industrial and infrastructure end markets.
Over time, Kennametal’s diversified customer base has boosted its competitive strength. Prime end-markets served by the company include aerospace, defense, transportation, general engineering, oil and gas, power generation, food & beverage, chemicals, mining, highway construction and road maintenance.
By fiscal 2017, Kennametal expects to double its base business to $5–$6 billion, including organic growth of 6−10%.
Also, Kennametal aims to develop a sound cost structure by rationalizing certain manufacturing facilities and reducing expenses through various cost-cutting programs. So far, Phase 1 of the company’s ongoing restructuring initiative has yielded savings of $30 million, while upon full implementation, it is expected to generate annual pre-tax savings of $50−$55 million. Moreover, the second and third phases of the restructuring program are projected to yield annualized savings of $40−$50 million and $25−$30 million, respectively.
However, despite these positives, Kennametal is exposed to risks arising from near-term headwinds. For fiscal 2016, the company anticipates difficult operating conditions and forex-related losses to hurt its revenues. Top line is predicted to decline by 7−9%, including 1−3% decrease in organic revenues. Adverse foreign currency movements will likely impact earnings by 30−35 cents per share.
At the same time, Kennametal faces stiff competition in all businesses from both larger and smaller companies that offer same or similar products and services, or those producing different products appropriate for the same use. Also, the company’s debt levels, if left unchecked, will increase its financial obligations and subsequently, hurt profitability.
With a market capitalization of $2.3 billion, Kennametal currently carries a Zacks Rank #4 (Sell). The ranking is justified by near-term concerns surrounding the stock that also led to downward revisions in earnings estimates. Over the last 60 days, the Zacks Consensus Estimate for the stock has decreased 3.3% to $1.76 per share for fiscal 2016 and 4.5% to $2.12 for fiscal 2017.
Better-ranked stocks in the machinery industry include Energous Corporation WATT, Barnes Group Inc. B and Graham Corporation GHM. All three stocks carry a Zacks Rank #2 (Buy).
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