We recently reiterated our recommendation on Kennametal Inc. (KMT) at Neutral, anticipating the company to perform in line with the broader market.
Kennametal Inc. seems well positioned as a major player in the machine tools and accessories industry. The company has compelling long-term growth prospects and is equipped well to leverage benefits from the rising exposure to emerging markets.
The company has adopted various strategic initiatives that have proven very advantageous for its growth over time. Accretive acquisitions and dispositions of non-core assets is one of the favoured policies of Kennametal.
Of all, acquisition of Deloro Stellite Holdings in 2012 has strengthened the company’s product portfolio offered under the company’s Infrastructure segment. Also, mention may be made of the recent acquisition of Emura that will diversify and balance the company’s tungsten sourcing capabilities. This acquisition is expected to be immediately accretive to earnings.
Kennametal also follows a consistent policy of rewarding its shareholders by paying quarterly dividends, garnished with regular increases, and repurchasing shares. In Jul 2012, the company’s board of directors approved a 14% hike in its quarterly dividend rate and increased its share buyback program from 8 million shares to approximately 12 million shares.
Notwithstanding these positives, near-term concerns surrounding the stock have forced us to remain on the sidelines for Kennametal. A look into the last reported quarter and the guidance provided by management justify our concerns.
Kennametal’s financial performance in the three quarters of fiscal 2013 has been quite disappointing. Demand in the industrial and infrastructure markets was weak throughout which led to considerable decline in organic revenue while currency translation negatively impacted total revenue growth.
Management for fiscal 2013 anticipates no major change in end market demands and, hence, increased its organic and total revenue decline forecasts. Earnings per share guidance have also been revised down and cash flow from operations is expected to be lower than the prior forecast.
Other Stocks in the Industry
Kennametal Inc. currently has a market capitalization of $3.2 billion. Other stocks to watch out for in the industry are Lincoln Electric Holdings Inc. (LECO), with a Zacks Rank #1 (Strong Buy) while Chart Industries Inc. (GTLS) and Gardner Denver Inc. (GDI), each has a Zacks Rank #2 (Buy).
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