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Kennametal (KMT) Down 2% Since Last Earnings Report: Can It Rebound?

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A month has gone by since the last earnings report for Kennametal (KMT - Free Report) . Shares have lost about 2% 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 catalysts.

Kennametal Q2 Earnings Top Estimates, Improve on Sales

Kennametal reported better-than-expected results for second-quarter fiscal 2019 (ended Dec 30, 2018), with earnings beating estimates by 2.9%. This was the third consecutive quarter of recording impressive results.

This machinery company’s adjusted earnings in the reported quarter were 71 cents, surpassing the Zacks Consensus Estimate of 69 cents. Also, the bottom line improved 36.5% from the year-ago tally of 52 cents on the back of robust growth in segmental sales as well as benefits derived from the company’s initiatives — including growth, modernization and simplification.

Segmental Performances Drive Revenues

In the quarter under review, Kennametal generated revenues of $587.4 million, increasing 3% year over year, on the back of 4% organic revenue growth and 2% positive impact of business days. However, forex woes had a negative impact of 3%.

The top line lagged the Zacks Consensus Estimate of $606.2 million by 3.1%.

On a geographical basis, the company generated revenues of $295.6 million from American operations, increasing 7.3% year over year. Sales in Europe, Middle East and Africa (EMEA) were flat sequentially at $174.6 million while that for the Asia Pacific operations decreased 3.4% to $117.2 million.

The company reports revenue results under three segments — Industrial, WIDIA and Infrastructure. Its segmental performance for the fiscal second quarter is briefly discussed below:

Industrial revenues totaled $317.3 million, increasing 2% year over year. Organic revenues grew 3% and business days had a favorable impact of 3%. However, foreign currency translation had a negative impact of 4%.

WIDIA revenues were $49 million, up 3% year over year. The improvement was driven by a 4% increase in organic revenues and business days had a positive impact of 3%. However, foreign currency movements had a negative impact of 4%.

Infrastructure revenues totaled $221.1 million, increasing 5% year over year. The improvement was due to 4% organic revenue growth and 2% gain from business days. Forex woes had a negative impact of 1%.

Margin Profile Improves

Kennametal’s cost of goods sold in the reported quarter increased 1.8% year over year to $388.8 million. It represented 66.2% of revenues versus 66.8% in the year-ago quarter. Gross profit increased 4.8% year over year to $198.6 million, wherein margin increased by 60 basis points (bps) to 33.8%. Operating expenses totaled $114.6 million in the quarter under review, decreasing 6.1% year over year. As a percentage of revenues, it was 19.5% versus 21.4% in the year-ago quarter.

Adjusted operating income in the reported quarter increased 24.3% year over year to $80.9 million. Margin increased 240 bps to 13.8%. Margin was driven by growth in organic sales and gains from restructuring efforts. These positives were partially offset by rise in raw-material costs and manufacturing expenses (short-term in nature). Notably, inflation in raw material costs was offset by price realizations in the reported quarter. Adjusted effective tax rate was 21.3%, down from 28.4%.

Balance Sheet and Cash Flow

Exiting the fiscal second quarter, Kennametal had cash and cash equivalents of $96.3 million, decreasing 5.7% from $102.1 million at the end of the last reported quarter. Long-term debt and capital leases inched up 0.1% sequentially to $591.7 million.

In the six months ended December 2018, the company generated net cash of $61.5 million from operating activities, increasing 49.7% from the year-ago comparable period. Capital invested for purchasing property, plant and equipment totaled $88.1 million, above $59.5 million in the year-ago period. Free cash outflow was $24.1 million, up from $17.6 million in the six months ended December 2017.

Outlook

For fiscal 2019, Kennametal anticipates adjusted earnings per share of $2.90-$3.20, higher than $2.65 recorded in fiscal 2018. Organic sales growth is predicted to be 5-8%. Adjusted 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 a downward trend in fresh estimates.

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. However, the stock was allocated a grade of A on the value side, putting it in the top 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.

Outlook

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.




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