Neutral Rec for Kennametal - Analyst Blog


We recently reiterated our Neutral recommendation on Kennametal Inc. ( KMT ), anticipating the company to perform in line with the broader market.

Why Neutral?

Kennametal Inc. is a well known name in the machine tools and accessories industry that manufactures and distributes high-speed metal cutting tools, tooling systems, as well as wear-resistant parts. Year to date, the shares of the company have grown 10.7%.

Long-term growth prospects are bright as the company stands at an advantageous position to leverage benefits from growing demand especially from the emerging markets. By fiscal 2017, Kennametal anticipates to double its base business to the $5-$6 billion range. Besides, long-term targets include achieving organic growth rate of 6%-10% (CAGR), 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.

Accretive acquisitions and dispositions of non-core assets are Kennametal's primary tool for a growth strategy which entails business portfolio shift toward favored growth markets. Benefits are expected from the company's acquisition of Stellite, Emura and tungsten materials business from Allegheny Technologies Incorporated. Recently, synergies expected from the tungsten materials business were increased by the company.

Also, the policy of rewarding shareholders through dividend payments and share buybacks will work in favour of the company. In Jul 2013, a hike of 12.5% or 2 cents in the quarterly dividend rate was approved by the company's board of directors. Multi-year share repurchase program has been increased from 12 million shares to approximately 17 million shares.

Notwithstanding these positives, near-term concerns surrounding the stock have forced us to remain on the sidelines for Kennametal. A look into the last reported quarter and the guidance provided by management justify our concerns.

Kennametal's results in the fiscal first quarter 2014 were plagued by a decline in organic revenue. Industrial segment revenue generation was weak in aerospace and defense markets while it declined 5% in Asia. Infrastructure segment reported 6% organic revenue decline due to weakness in earthworks, energy and transportation markets. By region, the segment's performance was weak in Asia and the Americas.

Based on slower-than-expected recovery in served end-markets, the company lowered its organic growth rate as well as earnings per share guidance for fiscal 2014. Kennametal's long-term debt stood at $703 million; any further increase will likely raise the company's financial obligations and, hence, prove detrimental to the company's profitability.

Other Stocks in the Industry

Kennametal Inc. currently has a market capitalization of $3.7 billion. Other stocks to watch out for in the industry are Xylem Inc. ( XYL ), CIRCOR International, Inc. ( CIR ) and NN Inc. ( NNBR ), each with a Zacks Rank #1 (Strong Buy).

CIRCOR INTL (CIR): Free Stock Analysis Report

KENNAMETAL INC (KMT): Free Stock Analysis Report

NN INC (NNBR): Free Stock Analysis Report

XYLEM INC (XYL): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , Business , Stocks

Referenced Stocks: CAGR , CIR , KMT , NNBR , XYL

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