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It has been about a month since the last earnings report for Kennametal (KMT). Shares have added about 8% 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 Tops on Q2 Earnings, Expects Q3 Sales Growth
Kennametal reported impressive results for second-quarter fiscal 2021 (ended Dec 31, 2020). Its earnings in the quarter surpassed estimates by 60%, making it the fourth consecutive earnings beat for the company. Also, its sales beat estimates by 2.61%.
The machinery company’s adjusted earnings in the reported quarter were 16 cents, surpassing the Zacks Consensus Estimate of 10 cents. However, the bottom line decreased 5.9% from the year-ago figure of 17 cents on weak sales.
Kennametal generated revenues of $440.5 million, declining 12.8% year over year. While organic sales fell 14% in the quarter, divestitures lowered sales by 1%. Business days and foreign currency translation had a positive impact of 1% each.
However, Kennametal’s top line surpassed the Zacks Consensus Estimate of $429 million.
It is worth noting here that the company’s quarterly top line improved 10% on a sequential basis on the back of demand improvement in general engineering and transportation markets.
On a geographical basis, its revenues from America operations decreased 20.8% year over year to $194.3 million, while that from the Europe, the Middle East and Africa (EMEA) region declined 8.8% to $137.2 million. Sales from the Asia Pacific dropped 0.3% to $109 million.
The company reports its results under two business segments — Metal Cutting and Infrastructure. Its segmental performance for the fiscal second quarter is briefly discussed below:
Metal Cutting revenues of $282.9 million were down 12.6% year over year. The results were adversely impacted by a 14% decline in organic revenues, partially offset by a 1% positive impact of foreign currency translation. On a sequential basis, the segment’s revenues grew 14%.
Infrastructure revenues totaled $157.6 million, declining 13.2% year over year. The results were affected by a 14% decline in organic sales and a 1% adverse impact of divestitures. However, business days and foreign currency translation positively impacted by 1% each. On a sequential basis, the segment’s revenues grew 3%.
Kennametal’s cost of goods sold in the reported quarter dipped 14.5% year over year to $319 million. It represented 72.4% of revenues compared with 73.9% in the year-ago quarter. Gross profit deteriorated 7.9% year over year to $121.5 million, wherein margin grew 150 basis points (bps) to 27.6%. Operating expenses summed $97.8 million in the quarter under review, decreasing 9.1% year over year. As a percentage of revenues, operating expenses were 22.2% compared with 21.3% a year ago.
Adjusted operating income in the reported quarter decreased 4.9% year over year to $23.3 million. Adjusted operating margin grew 50 bps year over year to 5.3%.
Adjusted effective tax rate was 24.7% in the quarter, down from 29.6% in the prior-year quarter.
Balance Sheet and Cash Flow
Exiting the fiscal second quarter, Kennametal’s cash and cash equivalents was $103.2 million, up 5% from the previous quarter’s figure of $98.3 million. Long-term debt and capital leases were stable sequentially at $593.8 million.
In the first half of the fiscal year, the company generated net cash of $67.4 million from operating activities, declining 22.7% from the previous year. Capital invested in purchasing property, plant and equipment (net of the amount received on disposals) was $67.7 million, below $146.7 million reported in the year-ago period. Free cash outflow was $360 million versus an outflow of $59.6 million in the first half of fiscal 2020.
The company predicts annualized savings of $65-$75 million from its restructuring actions in fiscal 2021. Pre-tax charges in the year will likely be $90-$100 million. Inception to date, the company has realized savings of $48 million (including $12 million in the second quarter of fiscal 2021) and incurred costs of $75 million (including $4 million in the reported quarter).
In addition, restructuring actions for fiscal 2020 resulted in savings of $35 million (including $5 million in the second quarter of fiscal 2021) and pre-tax expenses of $55 million. Measures under this program are substantially complete.
In the quarters ahead, Kennametal anticipates gaining from simplification/modernization activities, solid product offerings 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 third quarter (ending March 2021), the company anticipates a sequential sales increase in mid- to high-single digits.
Cash flow from operating activities is anticipated to be positive in the second half of the year and for the full year. Capital spending is expected to be $110-$130 million for fiscal 2021.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in estimates review. The consensus estimate has shifted -37.38% due to these changes.
At this time, Kennametal has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.
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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