We issued an updated research report on Kennametal Inc. KMT on Mar 21, 2016. Despite long-term positives, the company’s exposure to risks will restrict its growth momentum in the near term.
Kennametal is known for its high-speed metal cutting tools, tooling systems and wear-resistant parts. These products are mainly used by its diversified customer base in industrial and infrastructure end markets. Based on these positives and benefits anticipated from inorganic initiatives, the company projects total revenue growth of 2−3% and earnings per share growth of above 20% in the 2017−2019 timeframe.
Moreover, Kennametal is working on a sound cost structure through the rationalization of certain manufacturing facilities and by lowering costs through employee and cost-reduction programs. The company targets to generate annual pre-tax savings of $40−$45 million from Phase 1 of its restructuring activities, while the same are likely within $40−$50 million for Phase 2 and $25−$30 million for Phase 3.
However, Kennametal anticipates fiscal 2016 top line to suffer a setback from difficult operating conditions in the oil & gas industry and a slowdown in the Chinese automotive market. Also, the company expects the weaknesses in the U.S. and Chinese coal mining markets to adversely impact its top line.
For the full fiscal, revenue is projected to decline by 20−23%, while earnings per share is guided within $0.85–$1.05, down from $1.50−$1.70 projected earlier. To add to the woes, the company faces stiff competition in all businesses from both larger and smaller companies that offer the same or similar products and services, or from those manufacturing different products for the same use. Also, the company’s debt levels, if left unchecked, will increase its financial obligations and subsequently, hurt profitability.
Kennametal currently has a $1.8 billion market capitalization. Some well placed machinery stocks in the same space are Sun Hydraulics Corp. SNHY, Graco Inc. GGG and Nordson Corporation NDSN.
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