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Kennametal (KMT) Up 20.3% Since Last Earnings Report: Can It Continue?

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Zacks Equity Research
·6 min read
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A month has gone by since the last earnings report for Kennametal (KMT). Shares have added about 20.3% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Kennametal due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Kennametal Beats Q1 Earnings and Sales Estimates

Kennametal reported better-than-expected results for first-quarter fiscal 2021 (ended Sep 30, 2020). Its earnings in the quarter surpassed estimates by 50%, while sales beat the same by 4%.

The machinery company’s adjusted earnings in the reported quarter were 3 cents, surpassing the Zacks Consensus Estimate of 2 cents. However, the bottom line decreased 82.4% from the year-ago figure of 17 cents on weak sales and margin results.

Revenue Details

Kennametal generated revenues of $400.3 million, declining 23% year over year. While organic sales fell 21% in the quarter, forex woes had an adverse impact of 1% and divestitures hurt results by 1%. The quarterly results suffered from weakness in end markets, including energy, aerospace, earthworks, transportation and general engineering.

However, Kennametal’s top line surpassed the Zacks Consensus Estimate of $385 million.

It is worth noting here that the company’s quarterly top line improved 6% on a sequential basis.

On a geographical basis, its revenues from America operations decreased 31% year over year, while that from the Europe, the Middle East and Africa (EMEA) region declined 20%. Sales from the Asia Pacific dropped 7%.

Metal Cutting revenues of $247.9 million were down 24% year over year. The results were adversely impacted by a 23% decline in organic revenues and a 1% impact from forex woes.

Infrastructure revenues totaled $152.4 million, declining 21% year over year. The results were affected by an 18% decline in organic sales and a 4% adverse impact of divestitures. However, business days’ impact was a positive 1%.

Margin Profile

Kennametal’s cost of goods sold in the reported quarter dipped 22.1% year over year to $295.2 million. It represented 73.8% of revenues compared with 73.2% in the year-ago quarter. Adjusted gross profit deteriorated 24% year over year to $108.1 million, wherein margin contracted 50 basis points (bps) to 27%. Operating expenses summed $93.3 million in the quarter under review, decreasing 18.3% year over year. As a percentage of revenues, operating expenses were 23.3% compared with 22% a year ago.

Adjusted operating income in the reported quarter slumped 53% year over year to $11.5 million. Notably, the downside is caused by a decline in organic sales, lower absorption of costs (including fixed and volume-related labor costs) and restructuring charges. However, the adverse impacts were partly offset by the benefits of simplification/modernization actions, gains from cost-reduction actions and a fall in raw material costs. Adjusted operating margin slipped 180 bps to 2.9%.

Adjusted effective tax rate was 33.4% in the quarter, up from 22.5% in the prior-year quarter.

Balance Sheet and Cash Flow

Exiting the fiscal first quarter, Kennametal’s cash and cash equivalents was $98.3 million, down 83.8% from the previous quarter’s figure of $606.7 million. Long-term debt and capital leases edged down 0.1% sequentially to $593.3 million.

In the fiscal first quarter, the company generated net cash of $9.6 million from operating activities, declining 65.1% from the previous year. Capital invested in purchasing property, plant and equipment (net of the amount received on disposals) came in at $39 million, below $72.1 million reported in the year-ago quarter. Free cash outflow was $29.4 million, down from an outflow of $44.5 million in the first quarter of fiscal 2020.

Restructuring Actions

The company predicts annualized savings of $65-$75 million from its restructuring actions in fiscal 2021. Pre-tax charges in the year will be $90-$100 million. Inception to date, the company has realized savings of $40 million (including $10 million in the first quarter of fiscal 2021) and incurred costs of $70 million (including $27 million in the reported quarter).

As part of the fiscal 2021 program, the company will cease operations in its Johnson City, TN-based manufacturing facility by the end of fiscal 2021 (ending June 2021).

In addition, restructuring actions for fiscal 2020 resulted in savings of $35 million (including $7 million in the first quarter of fiscal 2021) and pre-tax expenses of $55 million (including $2 million in the first quarter of fiscal 2021). Measures under this program are substantially complete.

Notably, the company’s incremental benefits from simplification/modernization actions were $22 million in the quarter under review.

Outlook

In the quarters ahead, Kennametal anticipates gaining from simplification/modernization activities, solid product offerings, cost-reduction actions and growth initiatives. However, end-market uncertainties related to the pandemic and a lack of visibility remain concerning. It refrained from issuing financial projections for fiscal 2021.

For the fiscal second quarter (ended December 2020), the company anticipates a year-over-year sales increase in low- to mid-single digits.

Capital spending is predicted to be $110-$130 million in fiscal 2021.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates revision. The consensus estimate has shifted -47.92% due to these changes.

VGM Scores

At this time, Kennametal has a subpar Growth Score of D, though it is lagging a bit on the Momentum Score front with an F. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of F. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Kennametal has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.


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