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Kennametal (KMT) to Gain From Strengthening of End-Markets


We have issued an updated research report on Kennametal Inc. KMT on Apr 10. Its earnings are projected to grow 5% in the next three to five years.

This machinery company currently carries a Zacks Rank #2 (Buy), a revision from its earlier Zacks Rank #3 (Hold). Its market capitalization is approximately $3.2 billion.

Let’s delve deeper and discuss why investors should consider adding Kennametal’s stock to their portfolio.

Financial Performance and Earnings Estimate Revision: Kennametal’s financial performance was impressive in two of the last four quarters, with an average positive earnings surprise of 17.82%. In the last quarter, its revenues surpassed the Zacks Consensus Estimate by 6.8% while increased 17.2% year over year. Also, the bottom line surged 116.7% year over year, on the back of healthy organic sales, favorable mix and margin improvement.

In the last 60 days, the stock’s Zacks Consensus Estimate remained stable at $2.57 for fiscal 2018 (ending June 2018) while increased 0.3% to $3.02 for fiscal 2019 (ending June 2019). On a year-over-year basis, these estimates reflect growth of 69.1% for fiscal 2018 and 17.6% for fiscal 2019.

Kennametal Inc. Price and Consensus

Kennametal Inc. Price and Consensus | Kennametal Inc. Quote

Solid Near-Term Prospects, Long-Term Targets: Kennametal anticipates its adjusted earnings to be $2.40-$2.70 per share in fiscal 2018, up from $1.52 recorded in fiscal 2017. Also, the current bottom-line projection is a revision from the company’s earlier projected amount of $2.30-$2.60. Organic sales growth is predicted to be 9-11%, higher than the earlier forecast of 5-7%. Free cash is projected to be up to $30 million versus the prior projection of up to $20 million.

Per the long-term targets issued in December 2017, Kennametal anticipates adjusted sales to be $2,500-$2,600 million by fiscal 2021. The adjusted gross margin is estimated to be approximately 41% while adjusted operating expenses are predicted to be roughly 20% of sales. Adjusted earnings before interest, taxes, depreciation and amortization margin will be 24-26% while adjusted operating margin will be 19-21%.

Healthy Segmental Businesses: Kennametal operates in three business segments — Industrial, WIDIA and Infrastructure. Its globally recognized brands are Kennametal and WIDIA. The offering of standardized and customized products to the vast customer base — especially in the transportation, aerospace, general engineering, earthworks and energy end markets — are the company’s key area of focus.

During fiscal 2019-2021 timeframe, Kennametal anticipates Industrial segment’s sales to grow 2-4% (CAGR) to $1,325-$1,370 million. The segment will gain from the strengthening of end markets, including general engineering, transportation, aerospace and energy. For the WIDIA segment, sales are projected to grow 9-11% (CAGR) to $260-$270 million. Strong distribution network and portfolio of highly recognized product brands will be advantageous for the segment, especially in the Americas; Europe, the Middle East and Africa; India and the Asia Pacific. For the Infrastructure segment, sales are projected to grow 3-5% (CAGR) to $915-$960 million. Healthy operating conditions in key end-markets, including industrial applications, mining, oil & gas, process industries and construction, will be beneficial.

Benefits From Strategic Initiatives: Kennametal has undertaken measures, aiming to improve profitability through cost reduction, including strategic sourcing, modernization (the initiatives are improving cycle time, productivity, quality and throughput) and facility rationalization. These initiatives, substantially completed in the first quarter of fiscal 2018, yielded benefits of $21 million from headcount reduction and $19.5 million from other restructuring programs. Annualized benefits are predicted to be roughly $165 million. Additionally, the company is on track to realize benefits from its modernization and end-to-end initiatives.

Other Stocks to Consider

Some other top-ranked stocks in the Zacks Industrial Products sector are DXP Enterprises, Inc. DXPE, Dover Corporation DOV and Kadant Inc. KAI. While DXP Enterprises sports a Zacks Rank #1 (Strong Buy), both Dover and Kadant carry a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

In the last 60 days, earnings estimates for each of these stocks improved for the current year. Also, average positive earnings surprise for the last four quarters was 189.56% for DXP Enterprises, 7.26% for Dover and 18.89% for Kadant.

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