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Here’s Why You Should Add Kennametal (KMT) to Your Portfolio

Zacks

We have issued an updated research report on Kennametal Inc. KMT on Jan 9. We believe that a diversified business structure and cost-reduction initiatives make this stock an attractive choice for investors seeking exposure in the machinery industry.

It currently carries a Zacks Rank #2 (Buy). Currently, the stock’s market capitalization is approximately $4.1 billion.

Kennametal’s financial performance was better than expected in three of the last four quarters, with an average positive earnings surprise of 20.56%. The stock’s Zacks Consensus Estimate is currently pegged at $2.54 for fiscal 2018 (ending June 2018) and $2.91 for fiscal 2019. Estimates for fiscal 2018 have remained stable in the last 60 days while that for fiscal 2019 grew 2.1%.

Also, market sentiments have been positive for Kennametal with the stock yielding 23.8% return in the last three months. This gain is above 10% growth of the industry it belongs to.




Below we discuss why investors should consider adding Kennametal’s stock to their portfolio.

Competitive Advantage: Diversified business structure has given Kennametal a competitive edge over other players in the industry. It currently operates through three business segments — Industrial, WIDIA and Infrastructure — largely minimizing its risk of loss from poor performance of any single group. Also, a vast customer base in various end markets especially aerospace, automotive, machine tool, farm machinery, highway construction, coal mining, quarrying, and oil and gas exploration industries is a positive.

Also, constant efforts for expanding its business internationally have strengthened the company’s growth prospects. Notably, the company derived nearly 43.6% of net revenues from its operations in United States while the rest were sourced from international operations in fiscal 2017.

Strategic Initiatives: Kennametal aims at improving profitability through cost reduction efforts, including strategic sourcing, modernization (the initiatives are improving cycle time, productivity, quality and throughput) and facility rationalization.

As noted, the company has substantially completed its restructuring programs in the fiscal first quarter 2018, realizing benefits of $21 million from head count reduction and $19.5 million from other restructuring programs. On an annualized basis, benefits from these programs are approximately $165 million. Additionally, the company is on track to realize benefits from its modernization and end-to-end initiatives.

Long-Term Vision: At its Investor Day, Kennametal provided an insight on its long-term growth targets. For the four years from fiscal 2018 to fiscal 2021, the company anticipates impressive top-line performance and declining operating expenses to boost its margin profile.

By fiscal 2021, adjusted sales are anticipated to be within the $2.5-$2.6 billion range. Adjusted gross margin is estimated to be approximately 41% while adjusted operating expenses are predicted to be roughly 20% of sales. As a percentage of sales, adjusted earnings before interest, tax, depreciation and amortization (EBITDA) of $600-$675 million will represent 24-26%. Adjusted operating margin will be within the 19-21% range.

On a segmental basis, Industrial’s sales are anticipated to grow 2-4% (CAGR) during fiscal 2019-2021 while that for the WIDIA and Infrastructure are projected to grow 9-11% and 3-5%, respectively.

Impressive Projections for Fiscal 2018: Kennametal anticipates adjusted earnings per share for fiscal 2018 to be within the $2.30-$2.60 range, higher than the previous projection of $2.00-$2.30. The bottom-line results will gain from organic sales growth of 5-7%, higher than the previous forecast of 2-4%, and benefits from cost-reduction initiatives. Free cash is projected to be within $0-$20 million range.

Further, as detailed in Kennametal’s Investor Day, adjusted sales are anticipated to be within the $2.2-$2.3 billion range. Margin profile is predicted to improve year over year, with adjusted gross margin of 34.5-35.5% and adjusted operating margin of 11.5-12.5%. Operating expenses will represent 21.5-22.5% of sales and adjusted EBITDA margin is predicted to be 16.5-17.5%.

Other Stocks to Consider

Some other stocks worth considering in the machinery space are Colfax Corporation CFX, Atlas Copco AB ATLKY and EnPro Industries, Inc. NPO. While Colfax sports a Zacks Rank #1 (Strong Buy), both Atlas Copco and EnPro Industries carry a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Colfax’s earnings estimates for 2018 improved in the last 60 days. The company pulled off an average positive earnings surprise of 5.31% in the last four quarters.

Atlas Copco performed well in the last quarter, with a positive earnings surprise of 4.65%. Also, earnings expectations for 2018 have improved over the past 60 days.

EnPro Industries’ earnings estimates for 2018 were revised upward in the last 60 days.

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