It has been about a month since the last earnings report for Kennametal (KMT - Free Report) . Shares have lost about 9.2% 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 its most recent earnings report in order to get a better handle on the important catalysts.
Kennametal Q4 Earnings Miss, 1H FY20 Outlook Weak
Kennametal has reported weaker-than-expected results for fourth-quarter fiscal 2019 (ended Jun 30, 2019), with earnings lagging estimates by 2.3%.
The machinery company’s adjusted earnings in the reported quarter were 84 cents, lagging the Zacks Consensus Estimate of 86 cents. Also, the company’s earnings declined 3.4% from the year-ago figure of 87 cents due to weak sales results.
For fiscal 2019, its adjusted earnings were $3.02 per share, lagging the Zacks Consensus Estimate of $3.05. However, the company’s earnings grew 14% year over year.
Segmental Weakness Lowers Revenues
In the quarter under review, Kennametal generated revenues of $603.9 million, declining 6.5% year over year. Organic sales declined 2% in the quarter while forex woes had an adverse impact of 4% and business days had negative impact of 1%.
Also, the company’s top line lagged the Zacks Consensus Estimate of $643.2 million by 6.1%.
On a geographical basis, it generated revenues of $308.1 million from America operations, declining 3.1% year over year. Sales in Europe, Middle East and Africa (EMEA) were down 10.3% to $173.8 million while that for the Asia Pacific declined 9.1% to $122.1 million.
The company reports revenue results under three segments — Industrial, WIDIA and Infrastructure. Its segmental performance for the fiscal fourth quarter is briefly discussed below:
Industrial revenues totaled $318 million, declining 8.9% year over year. The results were adversely impacted by a 4% decline in organic revenues, 4% impact of forex woes and 1% negative impact of business days.
WIDIA revenues were $48.9 million, down 8.3% year over year. The results were impacted adversely by forex woes of 3%, business days’ impact of 2% and organic sales decline of 2%.
Infrastructure revenues totaled $237 million, declining 2.7% year over year. The results were adversely impacted by 3% from forex woes and 1% from business days. Organic sales in the quarter grew 1%.
For fiscal 2019, the company’s revenues totaled $2,375.2 million, inching up 0.3% from the previous year. Its revenues missed the Zacks Consensus Estimate of $2.42 billion.
Operating Margin Improves
Kennametal’s cost of goods sold in the reported quarter declined 5.7% year over year to $390.2 million. It represented 64.6% of revenues versus 64.1% in the year-ago quarter. Gross profit moved down 8% year over year to $213.7 million, wherein margin declined 60 bps to 35.4%. Operating expenses totaled $116.1 million in the quarter under review, decreasing 10.6% year over year. As a percentage of revenues, it was 19.2% versus 20.1% in the year-ago quarter.
Adjusted operating income in the reported quarter declined 4.3% year over year to $95.3 million. Notably, fall in adjusted operating income was due to impacts of simplification/modernization actions, forex woes and lower absorption of costs (including fixed and volume-related labor costs) in some facilities. However, the adverse impacts were to some extent offset by lower compensation expenses and benefits of simplification/modernization actions. Adjusted operating margin rose 40 bps to 15.8%.
Adjusted effective tax rate was 21%, down from 22.1%.
Balance Sheet and Cash Flow
Exiting the fiscal fourth quarter, Kennametal had cash and cash equivalents of $182 million, increasing 61.6% from $112.6 million at the end of the last reported quarter. Long-term debt and capital leases inched up 0.1% sequentially to $592.5 million.
In fiscal 2019, the company generated net cash of $300.5 million from operating activities, increasing 8.4% from the year-ago period. Capital invested for purchasing property, plant and equipment totaled $212.3 million, above $171 million in fiscal 2018. Free cash inflow was $99.4 million, down from $120.7 million in fiscal 2018.
For fiscal 2020, Kennametal anticipates gaining from simplification/modernization initiatives, meant for simplifying the business structure, improving efficiency and boosting shareholder value. However, these restructuring measures will create cost-related headwinds in the first half of the fiscal year, with the impact likely to abate in the second half. Also, end-market conditions will be challenging in the first half while modest recovery is predicted on improvement in energy and transportation markets.
Organic sales growth is predicted to be (2%)-2% in fiscal 2020. For the Industrial segment, the company predicts that fall in tungsten prices will create margin headwinds in the first half of the fiscal year.
Adjusted earnings per share will likely be $2.80-$3.20. Notably, the company believes that roughly two-third portion of adjusted earnings will be generated in the second half. Effective tax rate is likely to be 21-23%.
Capital expenditure is expected to be $240-$260 million, largely supporting the company’s simplification/modernization initiatives. Free cash flow is estimated to be $75-$100 million.
How Have Estimates Been Moving Since Then?
It turns out, fresh estimates have trended downward during the past month. The consensus estimate has shifted -28.54% due to these changes.
At this time, Kennametal has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with a C. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the top 40% 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. It's no surprise Kennametal has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.