A month has gone by since the last earnings report for Kennametal (
KMT Quick Quote KMT - Free Report) . Shares have lost about 6.5% 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 the most recent earnings report in order to get a better handle on the important drivers.
Kennametal Q4 Earnings Miss Estimates, Revenues Up Y/Y
Kennametal reported lackluster results for fourth-quarter fiscal 2023 (ended Jun 30, 2023). KMT’s earnings miss the Zacks Consensus Estimate by 16.4% and quarterly sales missed estimates by 2.9%.
Adjusted earnings in the quarter under review were 51 cents per share, missing the consensus estimate of earnings of 61 cents per share. The bottom line decreased 3.8% from the year-ago figure. Revenue Details
In the quarter under review, Kennametal’s revenues were $550 million, reflecting an increase of 3.8% from the year-ago quarter’s figure. Organic sales in the quarter grew 7%. Foreign currency headwind left an adverse impact of 2% and unfavorable business days lowered sales by 1%. Business in aerospace and defense, and energy end markets flourished in the quarter.
KMT’s revenues missed the Zacks Consensus Estimate of $566 million. On a geographical basis, revenues from American operations increased 2.9% year over year to $271.5 million, whereas sales from Europe, the Middle East and Africa region were $168.4 million, up 10.7% from the year-ago quarter’s reading. Sales from the Asia Pacific belt decreased 3.2% to $110.3 million. Kennametal reports results under two business segments, namely Metal Cutting and Infrastructure. Its segmental performance for the fiscal fourth quarter is briefly discussed below: The Metal Cutting segment’s revenues of $336.9 million increased 6.5% year over year. Organic sales growth in the quarter was 10%. Forex woes had an adverse impact of 2% and unfavorable business days lowered sales by 2%. The Zacks Consensus Estimate for Metal Cutting’s revenues was pegged at $340 million. The Infrastructure segment’s revenues totaled $213.4 million, decreasing 0.1% year over year. Foreign currency movements had an adverse impact of 2% and unfavorable business days lowered sales by 1%. However, the results gained from 3% growth in organic sales. The consensus estimate for Infrastructure’s revenues was pegged at $225 million. Margin Profile
Kennametal’s cost of goods sold in the reported quarter increased 3.9% year over year to $374.6 million. The gross profit increased 3.5% year over year to $175.7 million wherein the margin contracted 10 basis points (bps) to 31.9%. Operating expenses summed $110 million in the quarter under review, up 7.1% year over year.
The operating income decreased 10.8% year over year to $55.9 million. Operating margin decreased 160 bps year over year to 10.2%. High raw material costs, wages, restructuring and related charges, general inflation, foreign currency exchange headwinds and lower sales volumes in the Infrastructure segment were spoilsports. Interest expenses in the reported quarter were $7.1 million, up 6% from the year-ago quarter’s figure. The adjusted effective tax rate was 19.7% in the quarter under review, down from 27.6% in the prior-year quarter. Balance Sheet and Cash Flow
While exiting the fourth quarter of fiscal 2023, Kennametal’s cash and cash equivalents were $106 million, compared with $85.6 million reported in fourth-quarter fiscal 2022. Long-term debt was $595.2 million, almost in line with the $594.4 million reported in the fiscal fourth quarter of 2022.
In fiscal 2023, Kennametal generated net cash of $257.9 million in operating activities, compared with $181.4 million net cash generated in the previous fiscal year’s quarter. Capital invested in purchasing property, plant and equipment (net of the amount received on disposals) was $94.4 million, down 2.6% from $96.9 million in the prior fiscal year. Free operating cash flow was $168.6 million, compared with $85.4 million in the previous fiscal year’s period. In fiscal 2023, KMT’s dividend payments totaled $65 million and it repurchased shares worth $49 million. Q1 Fiscal 2024 Guidance
For the first quarter of fiscal 2024 (ending September 2023), Kennametal anticipates sales of $485-$510 million. The midpoint of the guided range — $497.5 million — lies below the Zacks Consensus Estimate of $509.8 million. Earnings per share is anticipated to be 30-40 cents.
Adjusted effective tax rate is anticipated to be approximately 5%. Interest expense is anticipated to be approximately $7 million for the fiscal quarter. Fiscal 2024 Guidance
For fiscal 2024 (ending June 2024), the company anticipates sales of $2.10-$2.20 billion. The midpoint of the guided range — $2.15 billion — is in line with the Zacks Consensus Estimate. Adjusted earnings per share is anticipated to be $1.75-$2.15. The midpoint of the guided range — $1.95 — lies above the consensus estimate of earnings of $1.90 per share. The adjusted effective tax rate is anticipated to be approximately 24% in the full fiscal year. Free operating cash flow is expected to be approximately 100% of net income (adjusted).
Capital spending is expected to be $100-$110 million in fiscal 2024. How Have Estimates Been Moving Since Then?
It turns out, estimates revision have trended downward during the past month.
The consensus estimate has shifted -12.4% due to these changes.
Currently, Kennametal has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Kennametal has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.