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Kennametal Down to Strong Sell

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Zacks Investment Research downgraded Kennametal Inc. (KMT - Free Report) to a Zacks Rank #5 (Strong sell) on May 1, 2013.

Why the Downgrade?

Kennametal reported disappointing results for the fiscal third quarter 2013 (ended Mar 31) on Apr 25, 2013. The company’s earnings per share in the quarter came in at 65 cents, 33.7% below the year-ago reported earnings and 8.5% below the Zacks Consensus Estimate of 71 cents.

Revenue plummeted 5.9% year over year as it was adversely affected by a fall of 6% in organic revenue, a 5% impact from fewer working days in the quarter and 1% negative impact from foreign currency translation. These were, however, partially offset to the tune of 6% due to two months’ revenue contribution from Stellite.

Talking of costs and margins, cost of revenue represented 68.2% of total revenue in the quarter; up from 64.6% in the year-ago quarter while operating expenses stood at 19.6%. Adjusted operating margin was down 390 basis points year over year to 12.1% in the quarter.

Results for the fiscal third quarter as well as prevailing weakness in the company’s industrial end markets as well as in-road construction, underground mining, and oil and gas markets in the U.S. forced management of Kennametal to revise down its guidance for 2013.

It is anticipated that sales would now decline to the range of 5%-6% as against a drop ranging from 2%-4% expected earlier while organic revenue is predicted to decline within the 8%-9% range versus 7%-9% expected earlier. Earnings per share are now likely to fall within the $2.45-$2.55 range, below the $2.60-$2.80 range projected earlier.

Disappointing results in the quarter combined with a gloomy operating environment and lowered management guidance led to a downward revision in earnings estimate for Kennametal in the last 7 days. The Zacks Consensus Estimate for fiscal 2013 has gone down by 5.6% to $2.51 while for 2014, the estimate plummeted 4.6% to $3.32.

Also, Kennametal has a negative earnings surprise in three of four trailing quarters with an average of -15.3%. For fiscal 2013 and 2014, we have an Earnings ESP (Read: Zacks Earnings ESP: A Better Method) of 0.0% and -1.5%, respectively.

Other Stocks to Consider

Kennametal Inc. currently has a market capitalization of $3.1 billion. Other stocks to watch out for in the industry are EnPro Industries, Inc. (NPO - Free Report) and Graco Inc. (GGG - Free Report) , each with a Zacks Rank #1 (Strong Buy) while Lincoln Electric Holdings Inc. (LECO - Free Report) carries a Zacks Rank #2 (Buy).

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