Kennametal Inc. KMT seems to have lost its sheen due to challenging end-market conditions, restructuring charges, high tax rates and others. Also, weak price performance and lowered earnings estimates indicate bearish sentiments for the stock.
The company has a market capitalization of $2.5 billion and a Zacks Rank #4 (Sell) at present. It belongs to the Zacks Manufacturing – Tools & Related Products industry, currently at the top 42% (with the rank of 106) of more than 250 Zacks industries. You can see the complete list of today’s Zacks #1 Rank stocks here.
We believe that the industry is suffering from global uncertainties, unfavorable movements in foreign currencies, softness in industrial production in the United States and cost escalation — resulting from tariff woes, commodity inflation, high labor costs and freight charges.
Notably, Kennametal’s earnings lagged estimates by 10.5% in second-quarter fiscal 2020 (ended Dec 31, 2019). Also, sales lagged estimates by 3.7% and declined 14% year over year.
In the past three months, Kennametal's shares have declined 13.2% compared with the industry’s growth of 1.1%.
Factors Affecting Investment Appeal
Weak Projections: Kennametal expects that end-market challenges, issues related to 737 MAX and higher tax rates will adversely impact its results for the second half of fiscal 2020 (ending June 2020). It expects organic sales decline of 9-12% for the year versus a fall of 5-9% mentioned earlier.
Also, adjusted earnings per share in the year are anticipated to be $1.20-$1.50, down from the previously stated $1.70-$2.10. Tax rate for the year is expected to be 25-28%, higher than 22-24% mentioned previously.
Restructuring Costs: Kennametal’s simplification/modernization actions adversely impacted its operating results in the second quarter of fiscal 2020. Notably, pre-tax charges of $51 million or 39 cents per share were incurred from these restructuring moves in the quarter.
For fiscal 2020, the company expects to incur pre-tax charges of $55-$65 million from restructuring moves announced in July 2019. Also, pre-tax charges will likely be $55-$65 million for fiscal 2021 (ending June 2021).
Forex Woes: Presence in the Americas, the Asia Pacific, Europe, the Middle East and Africa has exposed Kennametal to geopolitical issues, macroeconomic challenges and unfavorable movements in foreign currencies. In second-quarter fiscal 2020, forex woes adversely affected the company’s sales by 1% and earnings by 1 cent per share.
Persistence of such issues might pose concerns for Kennametal.
Bottom-Line Estimate Trend: The Zacks Consensus Estimate for Kennametal’s earnings has been revised downward in the past seven days. The Zacks Consensus Estimate for earnings per share is currently pegged at $1.31 for fiscal 2020 and $2.04 for fiscal 2021 (ending June 2021), down 22.5% and 13.9% from the seven-day-ago figures.
Also, earnings estimates of 38 cents per share for third-quarter fiscal 2020 (ending March 2020) suggest a decline of 30.9% from the seven-day-ago figure.
Kennametal Inc. Price and Consensus