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Kennametal Gains From Restructuring Moves, Cost Woes Stay

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We issued an updated research report on Kennametal Inc. (KMT - Free Report) on Jan 8.

The industrial tool maker, with a market capitalization of $2.9 billion, currently carries a Zacks Rank #3 (Hold).

Factors Favoring the Company

Top-Line Prospects: Huge customer base in various end markets — including highway construction, machine tool, quarrying, automotive, farm machinery, coal mining, aerospace and oil and gas exploration — is a boon for Kennametal.

Also, the company’s geographical diversification, with operations in Asia Pacific, the Americas, Europe, Middle East and Africa, helps it deal with weakness in one or more serving countries.

Restructuring Measures: Kennametal is benefiting from its three initiatives — growth, modernization and simplification. While the simplification measure helped in improving operational efficiency and reducing costs, the growth initiative is boosting Kennametal’s sales through improvement in commercial execution. On the other hand, the modernization initiative is contributing to strong operating leverage.

In the first quarter of fiscal 2020 (ended Sep 30, 2019), these restructuring measures added 7 cents per share to the company’s earnings. The company anticipates these initiatives to yield annualized savings of $35-$40 million by fiscal 2020 end.

As part of the aforementioned initiatives, Kennametal commenced certain restructuring moves in July 2019. It ceased operations at its manufacturing facilities based in Irwin, PA and Lichtenau, Germany and moved forward with shutdown of its Neunkirchen-based distribution center. These restructuring moves are likely to start yielding benefits in the form of lower structural costs from the second half of fiscal 2020 (ending June 2020).

Rewards to Shareholders: Kennametal is committed toward rewarding shareholders handsomely through dividend payments. In fiscal 2019 (ended June 2019), the company paid out dividends of $65.7 million to its shareholders. Further, it distributed dividends totaling $16.6 million in the first quarter of fiscal 2020.

In the past three months, Kennametal's shares have gained 23% compared with the industry’s growth of 19%.



Factors Working Against Kennametal

Projections: Kennametal predicts that challenging end-market and regional conditions will impact its performance in fiscal 2020. Adjusted earnings are predicted to be $1.70-$2.10, lower than $2.80-$3.20 mentioned previously.

Also, organic sales are expected to decline 5-9% compared with down 2% to up 2% estimated earlier. Operating conditions will be difficult in energy, transportation and general engineering end markets. Moreover, the company predicts fiscal 2020 free cash flow to be $20-$50 million versus $75-$100 million stated earlier.

Costs Headwinds: In first-quarter fiscal 2020, high cost of raw materials as well as the impact of simplification/modernization actions adversely impacted Kennametal’s margins. Notably, simplification/modernization initiatives (pre-tax) charges were $8 million or 9 cents per share in the fiscal first quarter.

For fiscal 2020, Kennametal predicts restructuring charges to be $55-$65 million. Also, it believes that high raw material costs will impact its performance in the fiscal second quarter.

Woes Related to Geographical Diversification: International operations exposed Kennametal to geopolitical issues and unfavorable movements in foreign currencies. In first-quarter fiscal 2020, forex woes adversely impacted the company’s sales by 2% and earnings by 1 cent.

Persistence of such issues might pose concerns for the company.

Stocks to Consider

Some better-ranked stocks in the Zacks Industrial Products sector are Hickok Inc (CRAWA - Free Report) , Cintas Corporation (CTAS - Free Report) and DXP Enterprises, Inc (DXPE - Free Report) . While Hickok and DXP Enterprises currently sport a Zacks Rank #1 (Strong Buy), Cintas carries 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 stocks have improved for the current year. Further, positive earnings surprise for the last reported quarter was 15.56% for Hickok, 11.27% for Cintas and 16.39% for DXP Enterprises.

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