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Why Is Kennametal (KMT) Down 9.9% Since Last Earnings Report?
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It has been about a month since the last earnings report for Kennametal (KMT - Free Report) . Shares have lost about 9.9% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Kennametal due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.
Kennametal Q2 Earnings Lag Estimates, High Taxes Hurt
Kennametal reported weaker-than-expected results for second-quarter fiscal 2022 (ended Dec 31, 2021).
Adjusted earnings in the quarter under review were 35 cents per share, missing the Zacks Consensus Estimate of 40 cents. However, the bottom line surged 118.8% from the year-ago figure of 16 cents on the back of revenue growth and improvement in margins. Higher taxes and temporary cost-control actions had adverse impacts of 1 cent and 9 cents.
Revenue Details
In the quarter under review, Kennametal’s revenues were $486.7 million, reflecting an increase of 10.5% from the year-ago quarter. Organic sales in the quarter grew 11% and business days left an adverse impact of 1%. Business in energy, general engineering, aerospace, and earthworks markets flourished in the quarter. Weakness in the transportation market due to supply-chain restrictions played spoilsport.
The company’s revenues lagged the Zacks Consensus Estimate of $499 million and were higher than the low-end of the company’s projection of $480-$500 million.
On a geographical basis, its revenues from America operations increased 16.3% year over year to $225.9 million, whereas that from the Europe, the Middle East and Africa region grew 7.3% to $147.3 million. Sales from the Asia Pacific increased 4.1% to $113.5 million.
The company reports results under two business segments — Metal Cutting and Infrastructure. Its segmental performance for the fiscal second quarter is briefly discussed below:
Metal Cutting revenues of $298.6 million were up 5.5% year over year. Organic sales growth in the quarter was 7% and business days had an adverse impact of 1%.
Infrastructure revenues totaled $188.1 million, increasing 19.4% year over year. The results gained from 18% growth in organic sales and a 1% positive impact of foreign currency movements.
Margin Profile
Kennametal’s cost of goods sold in the reported quarter increased 4.6% year over year to $333.7 million. It represented 68.6% of revenues compared with 72.4% in the year-ago quarter. The gross profit grew 25.9% year over year to $153 million, wherein the margin increased 380 basis points (bps) to 31.4%. Operating expenses summed $106.7 million in the quarter under review, increasing 9.1% year over year. As a percentage of revenues, operating expenses were 21.9% compared with 22.2% a year ago.
Adjusted operating income in the reported quarter increased 92.6% year over year to $44.8 million. Adjusted operating margin expanded 390 bps year over year to 9.2%. The results benefited from favorable pricing and product mix, growth in organic sales, the reversal of restructuring and other charges, and simplification/modernization efforts. However, high salaries and increase in raw material costs played spoilsports.
Interest expenses in the reported quarter were $6.5 million, down 22.3% from the year-ago quarter. The adjusted effective tax rate was 26.5% in the quarter under review, up from 24.7% in the prior-year quarter.
Balance Sheet and Cash Flow
Exiting the fiscal second quarter, Kennametal’s cash and cash equivalents were $101.8 million, down 5.1% from the previous quarter’s figure of $107.3 million. Long-term debt was $592.7 million, a slight increase from $592.5 million in the previous quarter.
In the fiscal first half, the company generated net cash of $57.8 million from operating activities, decreasing 14.2% from the previous-year period. Capital invested in purchasing property, plant and equipment (net of the amount received on disposals) was $37.1 million, down 45.2% from $67.7 million in the year-ago period. Free cash flow was $20.7 million against an outflow of $0.4 million in the previous-year period.
In the quarter, the company’s dividend payments totaled $17 million and it repurchased shares worth $23 million.
Outlook
For the third quarter of fiscal 2022 (ending March 2022), the company anticipates sales of $500-$520 million, suggesting a year-over-year increase of 3-7%. On a sequential basis, strengthening end markets will be beneficial. Business in the transportation market is expected to be flat.
Adjusted operating income for the quarter is anticipated to be $55 million (at least). This suggests a year-over-year increase of 32%. The adjusted effective tax rate is expected to be 26-28%. Free operating cash flow is expected to be positive for the quarter.
For fiscal 2022 (ending June 2022), cost headwinds related to control measures taken in the previous year are predicted to be $25 million. The adjusted tax rate is anticipated to be 26-28% versus 25-28% stated previously and suggesting a rise from 23.6% recorded in fiscal 2021. Free cash flow is expected to be 100% of net income (adjusted).
Capital spending is expected to be $110-$120 million and free cash flow is likely to be 100% of net income.
How Have Estimates Been Moving Since Then?
It turns out, estimates revision have trended downward during the past month.
The consensus estimate has shifted -9.24% due to these changes.
VGM Scores
At this time, Kennametal has a nice Growth Score of B, though it is lagging a bit on the Momentum Score front with a C. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.
Outlook
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Kennametal has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.
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Why Is Kennametal (KMT) Down 9.9% Since Last Earnings Report?
It has been about a month since the last earnings report for Kennametal (KMT - Free Report) . Shares have lost about 9.9% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Kennametal due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.
Kennametal Q2 Earnings Lag Estimates, High Taxes Hurt
Kennametal reported weaker-than-expected results for second-quarter fiscal 2022 (ended Dec 31, 2021).
Adjusted earnings in the quarter under review were 35 cents per share, missing the Zacks Consensus Estimate of 40 cents. However, the bottom line surged 118.8% from the year-ago figure of 16 cents on the back of revenue growth and improvement in margins. Higher taxes and temporary cost-control actions had adverse impacts of 1 cent and 9 cents.
Revenue Details
In the quarter under review, Kennametal’s revenues were $486.7 million, reflecting an increase of 10.5% from the year-ago quarter. Organic sales in the quarter grew 11% and business days left an adverse impact of 1%. Business in energy, general engineering, aerospace, and earthworks markets flourished in the quarter. Weakness in the transportation market due to supply-chain restrictions played spoilsport.
The company’s revenues lagged the Zacks Consensus Estimate of $499 million and were higher than the low-end of the company’s projection of $480-$500 million.
On a geographical basis, its revenues from America operations increased 16.3% year over year to $225.9 million, whereas that from the Europe, the Middle East and Africa region grew 7.3% to $147.3 million. Sales from the Asia Pacific increased 4.1% to $113.5 million.
The company reports results under two business segments — Metal Cutting and Infrastructure. Its segmental performance for the fiscal second quarter is briefly discussed below:
Metal Cutting revenues of $298.6 million were up 5.5% year over year. Organic sales growth in the quarter was 7% and business days had an adverse impact of 1%.
Infrastructure revenues totaled $188.1 million, increasing 19.4% year over year. The results gained from 18% growth in organic sales and a 1% positive impact of foreign currency movements.
Margin Profile
Kennametal’s cost of goods sold in the reported quarter increased 4.6% year over year to $333.7 million. It represented 68.6% of revenues compared with 72.4% in the year-ago quarter. The gross profit grew 25.9% year over year to $153 million, wherein the margin increased 380 basis points (bps) to 31.4%. Operating expenses summed $106.7 million in the quarter under review, increasing 9.1% year over year. As a percentage of revenues, operating expenses were 21.9% compared with 22.2% a year ago.
Adjusted operating income in the reported quarter increased 92.6% year over year to $44.8 million. Adjusted operating margin expanded 390 bps year over year to 9.2%. The results benefited from favorable pricing and product mix, growth in organic sales, the reversal of restructuring and other charges, and simplification/modernization efforts. However, high salaries and increase in raw material costs played spoilsports.
Interest expenses in the reported quarter were $6.5 million, down 22.3% from the year-ago quarter. The adjusted effective tax rate was 26.5% in the quarter under review, up from 24.7% in the prior-year quarter.
Balance Sheet and Cash Flow
Exiting the fiscal second quarter, Kennametal’s cash and cash equivalents were $101.8 million, down 5.1% from the previous quarter’s figure of $107.3 million. Long-term debt was $592.7 million, a slight increase from $592.5 million in the previous quarter.
In the fiscal first half, the company generated net cash of $57.8 million from operating activities, decreasing 14.2% from the previous-year period. Capital invested in purchasing property, plant and equipment (net of the amount received on disposals) was $37.1 million, down 45.2% from $67.7 million in the year-ago period. Free cash flow was $20.7 million against an outflow of $0.4 million in the previous-year period.
In the quarter, the company’s dividend payments totaled $17 million and it repurchased shares worth $23 million.
Outlook
For the third quarter of fiscal 2022 (ending March 2022), the company anticipates sales of $500-$520 million, suggesting a year-over-year increase of 3-7%. On a sequential basis, strengthening end markets will be beneficial. Business in the transportation market is expected to be flat.
Adjusted operating income for the quarter is anticipated to be $55 million (at least). This suggests a year-over-year increase of 32%. The adjusted effective tax rate is expected to be 26-28%. Free operating cash flow is expected to be positive for the quarter.
For fiscal 2022 (ending June 2022), cost headwinds related to control measures taken in the previous year are predicted to be $25 million. The adjusted tax rate is anticipated to be 26-28% versus 25-28% stated previously and suggesting a rise from 23.6% recorded in fiscal 2021. Free cash flow is expected to be 100% of net income (adjusted).
Capital spending is expected to be $110-$120 million and free cash flow is likely to be 100% of net income.
How Have Estimates Been Moving Since Then?
It turns out, estimates revision have trended downward during the past month.
The consensus estimate has shifted -9.24% due to these changes.
VGM Scores
At this time, Kennametal has a nice Growth Score of B, though it is lagging a bit on the Momentum Score front with a C. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.
Outlook
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Kennametal has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.