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Zacks Investment Research downgraded Kennametal Inc. (KMT - Analyst Report) to a Zacks Rank #5 (Strong Sell) on January 29, 2013.

Why the Downgrade?

Lackluster performance in the second quarter of fiscal 2013 (ended Dec 31, 2012) along with a lowered guidance for 2013 triggered a downward revision in earnings estimates for the stock in the last 7 days. The Zacks Consensus Estimate for 2013 went down by 18.9% to $2.74 per share while that for 2014 decreased by 8.4% to $3.62 per share.

On January 24, 2013, Kennametal reported its second quarter 2013 results. Earnings per share were 50 cents, down 41% year over year and 21.9% below the Zacks Consensus Estimate of 64 cents.  

Sales in the quarter plummeted 1% year over year, dragged down by a 10% organic growth decline and 1% foreign currency translation. These were, however, offset by a 9% gain from the Stellite acquisition and 1% gain from more working days in the quarter. High cost of sales and lower volume in the quarter along with an unfavorable sales mix impacted operating results. Operating margin in the quarter decreased 400 basis points.

Lower volume demands led to a revision in the company’s 2013 guidance: total sales are likely to decline 2%-4% versus a 3%-6% increase expected earlier; organic growth would decline 7%-9% versus flat to 3% decline expected earlier and earnings per share are expected to range within $2.60-$2.80 as against the earlier expected range of $3.40-$3.70.

Other Stocks to Consider

Not all makers of machine tools and accessories are performing as poorly as Kennametal. Other stocks to watch out for in the industry are Sandvik AB (SDVKY), holding a Zacks Rank #1 (Strong Buy) and MRC Global Inc. (MRC - Analyst Report) and Atlas Copco AB (ATLKY), both holding a Zacks Rank #2 (Buy).

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