It has been about a month since the last earnings report for Kennametal (KMT - Free Report) . Shares have lost about 1.3% 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 drivers.
Fourth-Quarter Fiscal 2018 Highlights
Kennametal reported better-than-expected results for fourth-quarter fiscal 2018 (ended Jun 30, 2018), with earnings beating estimates by 6.1%.
The company's adjusted earnings in the reported quarter were 87 cents, surpassing the Zacks Consensus Estimate of 82 cents. Moreover, the bottom line improved 55.4% from the year-ago tally of 56 cents on the back of healthy growth in end markets as well as benefits derived from the company's initiatives — including growth, modernization and simplification.
In fiscal 2018, the company's adjusted earnings were $2.65 per share, roughly 74.3% above the year-ago tally of $1.52. Furthermore, the result surpassed the Zacks Consensus Estimate of $2.60.
Segmental Performances Drive Revenues
In the quarter under review, Kennametal generated revenues of $646.1 million, increasing 14.4% year over year, on the back of 10% organic revenue growth, 3% positive foreign currency impact and 1% positive impact from more business days.
The top line surpassed the Zacks Consensus Estimate of $633.5 million by 2%.
On a geographical basis, the company generated revenues of $318 million from American operations, increasing 10.6% year over year. Sales in Europe, Middle East and Africa (EMEA) grew 14.8% to $193.8 million while that from the Asia Pacific operations increased 23.4% to $134.3 million.
The company reports revenue results under three segments — Industrial, WIDIA and Infrastructure. Its segmental performance in fiscal fourth-quarter is briefly discussed below:
Industrial revenues totaled $349.2 million, increasing 16.3% year over year. Organic revenues grew 11% and foreign currency translation had a positive impact of 4%. More business days had a favorable impact of 1%.
WIDIA revenues were $53.4 million, up 12.4% year over year. The improvement was driven by a 9% increase in organic revenues and 2% positive impact from foreign currency movements. More business days had a positive impact of 1%.
Infrastructure revenues totaled $243.6 million, increasing 12.1% year over year. The improvement was due to 9% organic revenue growth, 2% positive impact from foreign currency movements and 1% gain from more business days.
In fiscal 2018, the company's revenues were $2,367.9 million, reflecting year-over-year growth of 15% from the previous year. Organic sales grew 12% while forex tailwinds had 4% positive impacts. Business days had a negative 1% impact. Moreover, the top line exceeded the Zacks Consensus Estimate of $2.35 billion.
Margin Profile Improves
Kennametal's adjusted cost of goods sold in the reported quarter increased 7.2% year over year to $410.5 million. It represented 63.5% of revenues versus 67.8% in the year-ago quarter. Adjusted gross margin increased 430 basis points (bps) to 36.5%.
Adjusted operating expenses totaled $128.6 million in the quarter under review, increasing 12.1% year over year. As a percentage of revenues, it was 19.9% versus 20.3% in the year-ago quarter. Adjusted operating margin grew 480 bps year over year to 16%, on the back of growth in organic sales, favorable mix, forex tailwinds and gains from the company's restructuring efforts. These positives were partially offset by rise in raw-material costs as well as higher compensation and overtime expenses. It is worth noting that inflation in raw material costs was more than offset by price realizations in the reported quarter.
Restructuring programs yielded $55 million of incremental savings in fiscal 2018.
Balance Sheet and Cash Flow
Exiting the fiscal fourth quarter, Kennametal had cash and cash equivalents of $556.2 million, up 150.6% from $221.9 million at the end of the last-reported quarter. Long-term debt and capital leases were roughly $591.5 million, down 15%, sequentially.
During the reported quarter, the company issued $300 million of senior unsecured notes, using its proceeds for the redemption of notes due July 2018. Also, an amendment to a revolving currency facility extended the maturity from April 2021 to June 2023 as well as increased the borrowing capacity by $100 million to $700 million. Borrowing margin is lower for the amended facility.
In the quarter under review, the company generated net cash of $96.7 million from its operating activities, down 14.1% from the year-ago quarter. Capital invested for purchasing property, plant and equipment totaled $42.7 million, above $23.9 million in the year-ago quarter. Free cash flow was $66.2 million, decreasing from $89.8 million in the fourth quarter of fiscal 2017.
In fiscal 2019, Kennametal anticipates gaining from growth, modernization and simplification initiatives. Furthermore, strengthening end markets will be a boon while favorable price realization will continue offsetting raw material cost inflation. Tariffs are not expected to adversely impact the company's sales and costs. Improvement in margin is anticipated in fiscal 2019 and the days ahead.
Adjusted earnings per share are predicted to be $2.90-$3.20, higher than $2.65 recorded in fiscal 2018. Organic sales growth is predicted to be 5-8%. Forex impacts are likely to be unfavorable for the top line. The tax rate is likely to be 22-25%. Capital expenditure is expected to be $240-$260 million and free cash flow is estimated to be $120-$140 million.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in fresh estimates. The consensus estimate has shifted 7.98% due to these changes.
Currently, Kennametal has a strong Growth Score of A, a grade with the same score on the momentum front. 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 A. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Kennametal has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.