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Why Is Kennametal (KMT) Up 4.5% Since Last Earnings Report?

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A month has gone by since the last earnings report for Kennametal (KMT - Free Report) . Shares have added about 4.5% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Kennametal due for a pullback? 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 drivers.

Kennametal Q3 Earnings & Revenues Surpass Estimates

Kennametal reported better-than-expected results for third-quarter fiscal 2022 (ended Mar 31, 2022). KMT’s earnings beat the Zacks Consensus Estimate by 11.9%. Also, quarterly sales beat estimates by 0.7%.

Adjusted earnings in the quarter under review were 47 cents per share, beating the Zacks Consensus Estimate of 42 cents. The bottom line surged 46.9% from the year-ago figure of 32 cents on the back of revenue growth and improved margins.

Revenue Details

In the quarter under review, Kennametal’s revenues were $512 million, reflecting an increase of 6% from the year-ago quarter’s figure. Organic sales in the quarter grew 8% while business days left an accretive impact of 2%. Foreign currency headwind left an adverse impact of 4%.  Business in energy, general engineering, aerospace and earthworks markets flourished in the quarter. Weakness in the transportation market due to supply-chain restrictions was a spoilsport.

KMT’s revenues beat the Zacks Consensus Estimate of $509 million and surpassed the lower end of management’s projection of $500-$520 million.

On a geographical basis, its revenues from America operations increased 15.1% year over year to $250 million, whereas sales from Europe, the Middle East and Africa region were $152.6 million, almost flat with the year-ago quarter’s reading. Sales from the Asia Pacific belt decreased 4.6% to $109.6 million.

Kennametal reports results under two business segments, namely Metal Cutting and Infrastructure. Its segmental performance for the fiscal third quarter is briefly discussed below:

Metal Cutting revenues of $314 million were up 2% year over year. Organic sales growth in the quarter was 5% while business days had an accretive impact of 2%. Forex woes had an adverse impact of 5%.

Infrastructure revenues totaled $198 million, increasing 12% year over year. The results gained from 12% growth in organic sales and a 1% positive impact from business days, while foreign currency movements had an adverse impact of 1%.

Margin Profile

Kennametal’s cost of goods sold in the reported quarter increased 3.9% year over year to $347.6 million. The same represented 67.9% of revenues compared with 69% in the year-ago quarter. The gross profit grew 9.6% year over year to $164.6 million, wherein the margin increased 110 basis points (bps) to 32.1%. Operating expenses summed $107.1 million in the quarter under review, decreasing 0.9% year over year. As a percentage of revenues, operating expenses were 20.9% compared with 22.3% a year ago.

Adjusted operating income in the reported quarter surged 38.1% year over year to $58 million. Adjusted operating margin expanded 280 bps year over year to 11.4%. The results benefited from a favorable pricing and product mix, growth in organic sales, the reversal of restructuring and other charges, and simplification/modernization efforts. However, high manufacturing costs and increased raw material costs were spoilsports.

Interest expenses in the reported quarter were $6.4 million, down 69.4% from the year-ago quarter’s figure. The adjusted effective tax rate was 27.7% in the quarter under review, up from 20.6% in the prior-year quarter.

Balance Sheet and Cash Flow

Exiting the fiscal third quarter, Kennametal’s cash and cash equivalents were $100 million, down 1.8% from the previous quarter’s figure of $101.8 million. Long-term debt was $593.1 million, up from $592.7 million in the previous quarter.

In the fiscal nine months, Kennametal generated net cash of $93 million from operating activities, decreasing 33.2% from the previous fiscal-year period’s figure. Capital invested in purchasing property, plant and equipment (net of the amount received on disposals) was $59.4 million, down 36.1% from $92.9 million in the year-ago period. Free cash flow was $33.6 million compared with $46.3 million in the previous year.

In the quarter, KMT’s dividend payments totaled $17 million and it repurchased shares worth $15 million.

Kennametal announced that its board of directors approved the payment of a quarterly cash dividend of 20 cents per share to its shareholders of record as of May 10, 2022. The disbursement will be made on May 24.

Outlook

For the fourth quarter of fiscal 2022 (ending June 2022), Kennametal anticipates sales of $510-$530 million, suggesting the figure to be flat to up 3% from the number recorded in the last fiscal year’s comparable quarter. 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).

For fiscal 2022 (ending June 2022), cost headwinds related to control measures taken in the previous year are predicted to be $25 million for the first half of fiscal 2022. The adjusted tax rate is anticipated to be 26-28%. Free cash flow is expected to be 75% of net income (adjusted).

Capital spending is expected to be $105 million while free cash flow is likely to be 100% of net income.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates review.

The consensus estimate has shifted -19.66% due to these changes.

VGM Scores

At this time, Kennametal has an average Growth Score of C, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. 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 #5 (Strong Sell). We expect a below average return from the stock in the next few months.

Performance of an Industry Player

Kennametal belongs to the Zacks Manufacturing - Tools & Related Products industry. Another stock from the same industry, Lincoln Electric Holdings (LECO - Free Report) , has gained 0.5% over the past month. More than a month has passed since the company reported results for the quarter ended March 2022.

Lincoln Electric reported revenues of $925.45 million in the last reported quarter, representing a year-over-year change of +22.3%. EPS of $2.10 for the same period compares with $1.37 a year ago.

For the current quarter, Lincoln Electric is expected to post earnings of $1.98 per share, indicating a change of +18.6% from the year-ago quarter. The Zacks Consensus Estimate has changed +3% over the last 30 days.

Lincoln Electric has a Zacks Rank #2 (Buy) based on the overall direction and magnitude of estimate revisions. Additionally, the stock has a VGM Score of B.


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