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Shares of Kennametal Inc. KMT have declined sharply since the beginning of 2020. We believe that the price decline primarily reflects investors’ reactions to the company’s results for second-quarter fiscal 2020 (ended Dec 31, 2019) and dismal fiscal 2020 projections.
The Pittsburgh, PA-based company belongs to the Zacks Manufacturing – Tools & Related Products industry, which, in turn, comes under the ambit of the Zacks Industrial Products sector.
Year to date, the company’s shares have dipped 38.9% compared with the industry’s decline of 22.8% and the sector’s fall of 16.8%. Notably, the S&P 500 has declined 10.6% during the same period.
The company currently carries a Zacks Rank #4 (Sell).
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Factors Affecting the Stock
So far in 2020, Kennametal has reported results for second-quarter fiscal 2020. Results were weaker than expected, with earnings and sales lagging the Zacks Consensus Estimate by 10.5% and 3.7%, respectively. Organic sales in the quarter were down 12% due to weakness in India, the United States and Germany as well as concerns related to the supply chain of 737 MAX. Forex woes too played spoilsport in the quarter.
In addition to the dismal performance, Kennametal’s weak projections for fiscal 2020 (ending June 2020) have added to the bearish sentiments for the stock. The company believes that challenges in end-markets served, issues with 737 MAX and higher taxes (of 25-28% versus 22-24% mentioned earlier) will have adverse impacts in the second half of the year.
For fiscal 2020, Kennametal expects a 9-12% decline in organic sales, worse than a 5-9% fall mentioned earlier. Adjusted earnings are expected to be $1.20-$1.50, down from $1.70-$2.10 stated previously.
In addition, unfavorable movements in foreign currencies as well as pre-tax charges related to restructuring moves might be concerning for the company. For fiscal 2020, pre-tax restructuring charges (for initiatives announced in July 2019) are expected to be $55-$65 million.
Notably, the company has manufacturing facilities and assets in China. Sales derived from the country’s operations were 10.4% of total revenues in 2019. During the second-quarter earnings release, Kennametal did not talk about the impacts of the coronavirus (officially named as COVID-19) outbreak on its results.
Currently, the Zacks Consensus Estimate for the company’s earnings is pegged at $1.31 for fiscal 2020 and $2.04 for fiscal 2021 (ending June 2021), marking declines of 26.4% and 15.7% from the respective 60-day-ago figures. Notably, there were six downward revisions in estimates for both years. No upward revision in estimates has been recorded in the past 60 days.
Kennametal Inc. Price and Consensus
Kennametal Inc. price-consensus-chart | Kennametal Inc. Quote
Such downward revisions in earnings estimates are reflective of bearish sentiments for the company.
Kennametal’s Performance Versus Three Peers
The company underperformed three peers in the year-to-date period. Three such stocks are Colfax Corporation CFX, Stanley Black & Decker, Inc. SWK and IDEX Corporation IEX, with respective year-to-date declines of 21.8%, 21.2% and 16%.
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