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Kennametal (KMT) Banks on End-Market Strength Amid Cost Woes

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Kennametal Inc. (KMT - Free Report) is poised to gain from solid product offerings, commercial and operational excellence, and a wide geographical presence. The company’s accretive pricing actions are also supporting its growth.

KMT’s Metal Cutting segment is benefiting from strength in its aerospace and defense, general engineering, transportation, and energy end markets. Also, its strategic initiatives, innovation and operational excellence bode well. Infrastructure segment’s revenues are supported by solid momentum in the general engineering end market. In addition, focus on lean operations to drive productivity, share gain initiatives in target end markets and continuing inventory optimization actions are driving the segment’s growth.

The company’s efforts to deliver impressive free operating cash flow are noteworthy. Flowserve’s free cash flow increased 98.8% year over year in fiscal 2023 (ended June 2023) due to improved working capital, specifically from a lower inventory level. In the quarters ahead, the company expects to increase cash flow through margin expansion and working capital improvements, including inventory reductions.

KMT’s commitment to rewarding its shareholders through dividends and share buybacks are encouraging. In fiscal 2023, the company distributed dividends totaling $65 million to its shareholders. The company also bought back shares worth $49 million in the same period.

However, the company’s expenses have been rising over the last several quarters, resulting in the contraction of margins. In fiscal 2023, the company’s cost of sales increased 4.9% year over year. In the same period, KMT’s operating margin decreased 150 basis points due to headwinds from rising raw material costs and higher wages.

Due to Kennametal’s extensive presence across international markets its operations are subject to risks associated with unfavorable movement in foreign currencies and geopolitical issues. Forex woes had an impact of 2% on Kennametal’s sales in the fiscal fourth quarter.

Zacks Rank & Stocks to Consider

KMT currently carries a Zacks Rank #3 (Hold). Some better-ranked companies from the Industrial Products sector are discussed below:

Caterpillar Inc. (CAT - Free Report) presently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks.

CAT’s earnings surprise in the last four quarters was 18.5%, on average. In the past 60 days, estimates for Caterpillar’s earnings have increased 8.3% for 2023. The stock has gained 39.1% in the past year.

A. O. Smith Corp. (AOS - Free Report) currently carries a Zacks Rank #2 (Buy). AOS’ earnings surprise in the last four quarters was 10.5%, on average.

In the past 60 days, estimates for A. O. Smith’s earnings have increased 2.9% for 2023. The stock has gained 9.7% in the past year.

Alamo Group Inc. (ALG - Free Report) presently carries a Zacks Rank of 2. ALG’s earnings surprise in the last four quarters was 13%, on average.

In the past 60 days, estimates for Alamo’s 2023 earnings have increased 1.1%. The stock has gained 22.4% in the past year.

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