) recently delivered record EPS for the second quarter, driven by
continued strong organic sales growth and operating leverage. It
was also the company's 11th consecutive positive earnings surprise.
Management once again raised its EPS guidance for 2012, prompting
analysts to revise their estimates higher. It is a Zacks #1 Rank
(Strong Buy) stock.
Despite a strong up in shares over the last few weeks, valuation
looks very reasonable with shares trading at just 11.2x 12-month
forward earnings. It is also sporting an attractive PEG ratio of
Kennametal produces metal-cutting tools and tooling systems for
metalworking manufacturers and suppliers across a wide range of
industries. It operates through two segments:
Industrial: 64% of sales
The company was founded in 1938 and is headquartered in Latrobe,
Pennsylvania. It has a market cap of $3.7 billion.
Fourth Quarter Results
Kennametal reported record results for the second quarter of its
fiscal 2012. Earnings per share came in at 91 cents, beating the
Zacks Consensus Estimate of 79 cents. It was a remarkable 60%
increase over the same quarter in 2011.
Revenue soared 13% to $642 million, ahead of the Zacks Consensus
Estimate of $640 million. This was primarily driven by a stellar
14% increase in organic revenue growth.
Sales were strong at both segments. The Industrial division saw
top-line growth of 11%, led by a 12% increase in general
engineering and a 16% increase in aerospace & defense. The
Infrastructure division experienced organic growth of 18%, driven
by 25% growth in energy and related products and a 15% increase in
Despite rising input costs, gross profit actually expanded from
35.4% to 36.1% of sales. This, along with leveraging of fixed
expenses, led to a whopping 45% increase in operating income.
Management once again raised its EPS guidance for 2012. The company
reiterated its statement that "global economic conditions and
worldwide industrial production are expected to continue to reflect
Management now expects EPS in the range of $3.70 to $3.90, up from
previous guidance of $3.60-$3.85. This prompted analysts to revise
their estimates higher, sending the stock to a Zacks #1 Rank
Based on consensus estimates, analysts project strong growth to
continue for Kennametal over the next couple of years. The Zacks
Consensus Estimate for 2012 is $3.83, within guidance, and
representing 28% growth over 2011 EPS. The 2013 consensus estimate
is currently $4.30, corresponding with 12% EPS growth.
Despite shares climbing 32% since December 19, valuation still
looks attractive for KMT. As long as there is not a significant
slowdown in the global economy this year, shares look like they
still have plenty of room to run higher.
Shares trade at just 11.2x 12-month forward earnings, a discount to
its 10-year median of 13.8x. Based on a 5-year EPS growth of 17.4%,
its PEG ratio is an attractive 0.7.
Its price to book ratio of 2.3 is in-line with the industry and
well within value criteria. It also trades at just 9.6x cash flow,
which is very attractive considering its growth outlook.
The Bottom Line
With strong growth projections, rising earnings estimates, and
attractive valuation, Kennametal offers a lot of upside potential.
Todd Bunton is the Growth & Income Stock Strategist for
and Co-Editor of the
Reitmeister Value Investor
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