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Kennametal (KMT) Suffers From End-Market Woes and High Costs

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We have issued an updated research report on Kennametal Inc. KMT on Nov 11.

The industrial company, with a market capitalization of $2.8 billion, currently carries a Zacks Rank #5 (Strong Sell).

Notably, its first-quarter fiscal 2020 (ended Jun 30, 2019) results were in line with estimates. However, on a year-over-year basis, earnings declined 75.7% on weak sales and margins. Notably, the company’s average earnings surprise for the last four quarters is a negative 0.80%.

Over the past six months, shares of Kennametal haven’t returned anything, while the industry moved 13.9% higher.

Let’s delve deeper and discuss the factors impacting the company’s investment appeal.

Organic Sales: Kennametal’s first-quarter fiscal 2020 results suffered from an 11.7% year-over-year decline in revenues. Organically, revenues declined 11% on weakness in Industrial, WIDIA and Infrastructure segments. Also, unfavorable movements in foreign currencies adversely impacted its top-line results.  

The company believes that weakness in organic sales due to difficult conditions in general engineering, transportation and energy end markets will impact its performance in fiscal 2020 (ending June 2020). It predicts organic sales decline of 5-9% for the fiscal year compared with previously mentioned fall of 2% to growth of 2%.

Cost & Expense Woes: Kennametal suffered from high cost of raw materials, lower absorption of costs in some facilities and simplification/modernization actions in first-quarter fiscal 2020. Charges related to simplification/modernization initiatives (pre-tax) were $8 million or 9 cents per share in the fiscal first quarter. Notably, gross and operating margins in the quarter declined 920 basis points (bps) and 970 bps, respectively.

The company predicts pre-tax restructuring charges of $55-$65 million for fiscal 2020. It also expects raw material costs to impact results in the fiscal second quarter (ending December 2019). It anticipates the adverse impact of the same to be less in the second half of fiscal 2020.

Bottom-Line Projections: Kennametal expects challenging end-market and regional conditions to impact fiscal 2020 results. It lowered adjusted earnings per share projections to $1.70-$2.10, down from $2.80-$3.20 stated earlier. Also, the company revised down its free cash flow expectation to $20-$50 million from $75-$100 million mentioned earlier.

We believe that weak projections set a bearish tone for Kennametal. In the past 30 days, the Zacks Consensus Estimate for the company’s earnings has been lowered by 37.8% to $1.78 for fiscal 2020 and 24.6% to $2.42 for fiscal 2021 (ending June 2021).

Kennametal Inc. Price and Consensus


Kennametal Inc. Price and Consensus

Kennametal Inc. price-consensus-chart | Kennametal Inc. Quote

Forex Woes: Geographical diversification exposed Kennametal to geopolitical issues, macroeconomic challenges and unfavorable movements in foreign currencies. Notably, forex woes lowered sales by 2% and earnings by 1 cent per share in the first quarter of fiscal 2020.

We believe that the persistence of unfavorable movements in foreign currencies may continue to adversely impact sales and earnings.

Stocks to Consider

Some better-ranked stocks in the Zacks Industrial Products sector are Tennant Company TNC, Dover Corporation (DOV - Free Report) and The Middleby Corporation MIDD. While Tennant currently sports a Zacks Rank #1 (Strong Buy), Dover and Middleby carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

In the past 60 days, earnings estimates for these companies have improved for the current year. Further, positive earnings surprise for the last reported quarter was 40% for Tennant, 4.58% for Dover and 5.52% for Middleby.

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