We issued an updated research report on Kennametal Inc.KMT on Sep 7, 2015. Despite being a globally recognized brand, the company's exposure to certain near-term headwinds has weakened its investment value of late.
Kennametal's product portfolio is its most attractive feature, comprising high-speed metal cutting tools and tooling systems as well as wear-resistant parts. Also, the company serves a diversified customer base in the industrial and infrastructure end-markets.
By fiscal 2017, the company plans to double its base business to $5-$6 billion, and expects its organic revenues to grow by 6−10% (Compound Annual Growth Rate - CAGR) and earnings per share by 15−20% ("CAGR"). Also, to improve its margin profile, the company has initiated certain restructuring programs that are likely to fetch annualized pre-tax savings within $115−$135 million.
However, despite these positives, Kennametal is subject to risks arising from uncertain global economic conditions, unfavorable foreign currency movements and stiff industry competition. For fourth-quarter fiscal 2015 (ended Jun 2015), the company's organic revenues were down 10% due to sales decline in transportation, aerospace & defense, earthworks and energy end-markets. Foreign currency translation negatively impacted its revenues by 7%. Industrial business was soft in the Americas and Europe, while the Infrastructure business suffered weakness in Europe, Asia and the Americas.
For fiscal 2016, Kennametal anticipates difficult operating conditions and forex-related losses to hurt its revenues. Top line is predicted to decline by 7−9%, including a 1−3% decrease in organic revenues. Adverse foreign currency movements will likely impact earnings to the tune of 30−35 cents per share.
With a market capitalization of $2.3 billion, Kennametal currently carries a Zacks Rank #5 (Strong 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 15.9% to $1.80 per share for fiscal 2016 and 27.7% to $2.17 for fiscal 2017.
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