Kennametal's Long-Term Growth Potential Solid, Runs Risks

Zacks Equity Research
Updated
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We have issued an updated research report on Kennametal Inc. KMT on Mar 21. The company specializes in manufacturing and distributing high-speed metal cutting tools, tooling systems, wear-resistant parts, cemented tungsten carbides, super alloys, among others.

Over the last three months, shares of this Zacks Rank #3 (Hold) company yielded 18.55% return, outperforming the gain of 13.20% seen by the Zacks categorized Machine Tools & Related Products industry.

However, on a P/E (TTM) basis, Kennametal’s shares looks overvalued compared with the broader industry with respective tallies of 33.22x and 22.32x in the last three-month period. Also, the stock is currently trading above the average of last three months P/E multiples.

Below we discuss some other relevant points that justify Kennametal’s current Zacks ranking:

Over the long run, Kennametal holds solid organic and inorganic growth opportunities that support its long-term targets. The company aims at achieving total revenue growth of 2−3% (Compound Annual Growth Rate – CAGR), earnings per share growth of above 20% (CAGR) and free cash flow greater than 10% of sales during the fiscal 2017−2019 period.

Also, Kennametal aims at developing a sound cost structure by rationalization of certain manufacturing facilities and lowering costs through employee and cost-reduction programs. By Dec 2018, the company expects its restructuring programs to yield pre-tax savings of approximately $147−$162 million while charges related to these initiatives will likely be $155−$175 million.

For fiscal 2017, the company anticipates adjusted earnings to be within $1.20−$1.50 per share range, higher than $1.11 recorded in the previous year. Free cash flow will likely come in a band of $90−$110 million.

However, Kennametal is exposed to risks from foreign currency translation, high debt levels and uncertain economic conditions. Also, the company encounters active competition in all of its businesses from both larger and smaller companies that offer the same or similar products and services, or those producing different products appropriate for the same use.

Stocks to Consider

Kennametal currently has a $3.1 billion market capitalization. Some better-ranked stocks in the industry include Sandvik AB SDVKY, Actuant Corporation ATU and Altra Industrial Motion Corporation AIMC. While Sandvik AB sports a Zacks Rank #1 (Strong Buy), both Actuant Corporation and Altra Industrial Motion carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Sandvik AB’s earnings estimates for 2017 and 2018 have been revised upward over the last 60 days.

Actuant Corporation reported better-than-expected results in the last four quarters, with an average positive earnings surprise of 11.47%. Also, bottom-line expectations for fiscal 2018 have improved over the last 60 days.

Altra Industrial Motion Corporation reported better-than-expected results in the last four quarters, with an average positive earnings surprise of 12.49%. Also, its earnings estimates for fiscal 2017 and fiscal 2018 improved in the last 60 days.

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Actuant Corporation (ATU): Free Stock Analysis Report
 
Kennametal Inc. (KMT): Free Stock Analysis Report
 
Sandvik AB (SDVKY): Free Stock Analysis Report
 
Altra Industrial Motion Corp. (AIMC): Free Stock Analysis Report
 
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