Kennametal (KMT) Down 8.5% Since Earnings Report: Can It Rebound?

A month has gone by since the last earnings report for Kennametal Inc. KMT. Shares have lost about 8.5% in that time frame, underperforming the market.

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

Third-Quarter Fiscal 2017 Highlights

Kennametal reported impressive results for third-quarter fiscal 2017 (ended Mar 31, 2017). Adjusted earnings came in at $0.60 per share, surpassing the Zacks Consensus Estimate of $0.43 by 39.5%. Also, the bottom line surged 62.2% from the year-ago tally of $0.37.

The company's revenues totaled $528.6 million in the quarter, above the Zacks Consensus Estimate of $512.3 million. On a year-over-year basis, the top line increased 6.2% on the back of 5% organic revenue growth and 2% positive impact of more business days. However, the positives were partially offset by 1% adverse impact from foreign currency translation.

On a geographical basis, Kennametal generated sales of $245.6 million from its North American operations, increasing 5.8% year over year. Business in Western Europe remained weak, with revenues of $128.7 million declining 1.7% year over year. Revenues from Rest of the World grew 14.6% year over year to $154.4 million.

Segmental Details: Kennametal reports its revenue results under three segments viz. Industrial, WIDIA and Infrastructure (effective from the start of fiscal 2017). The company’s segmental performance is briefly discussed below:

The Industrial segment's net sales in the quarter were $289.5 million, increasing 5.6% year over year. Organic revenue growth of 5% and gain of 3% from more business days were partially offset by 2% negative impact from foreign currency translation.

Organic sales in energy, general engineering, aerospace & defense and transportation increased. On a geographical basis, revenues grew 17% in Asia, 4% in the Americas and 6% in Europe.

The WIDIA segment's revenues totaled $46.3 million, up 9.6% year over year. The year-over-year growth was driven by 9% increase in organic revenues and 1% gain from more business days. On a geographical basis, revenues grew 14% in Asia, 11% in the Americas and 3% in Europe.

The Infrastructure segment's revenues totaled $192.9 million, increasing 6.3% year over year. The improvement was due to 4% organic revenue growth and 2% gain from more business days.

Organic revenues increased in energy, earthworks and general engineering end markets. Geographically, revenues increased 12% in Asia and 6% in the Americas while remained flat in Europe.

Margins: In the quarter, Kennametal's adjusted cost of goods sold inched up 0.5% year over year, representing 64.5% of total revenue compared with 68.1% in the year-ago quarter. Adjusted gross margin improved 360 basis points (bps) to 35.5%.

Adjusted operating expense, as a percentage of total revenue, was 22%, down 120 bps year over year. Adjusted operating margin grew 500 bps year over year to 12.8%.

Balance Sheet and Cash Flow: Exiting the fiscal third quarter, Kennametal's cash and cash equivalents were $100.8 million, slightly below $102 million recorded at the previous quarter-end. Long-term debt and capital leases were roughly flat at $694.6 million.

In the quarter, Kennametal's net cash flow from operating activities totaled $33.4 million, down from $40.9 million in the year-ago quarter. Capital spending grew 6.4% year over year to $23.5 million. Free operating cash flow in the quarter was $10.3 million versus $19.5 million generated in the year-ago quarter.
 
Outlook: For fiscal 2017, Kennametal increased its adjusted earnings guidance to $1.50-$1.60 per share from the previous forecast of $1.20-$1.50. Free cash flow will likely come in a band of $60-$90 million, below the earlier issued guidance range of $90-$110 million. The decline was due to expectation of requirement of more working capital.

The company anticipates its restructuring programs, including headcount reduction initiatives and others, to yield pre-tax savings of approximately $165-$180 million by Dec 2018. Charges related to these initiatives will likely be $165-$195 million.

Of these programs, the company predicts its headcount reduction initiatives to result in estimated annualized savings of $90 million by Dec 2017. Related charges will be roughly $60-$70 million. In addition, the other programs are likely to generate savings of $75-$90 million by Dec 2018. Related charges will be $105-$125 million.

Also, over the next three years, the company anticipated to start realizing benefits from its modernization and End-to-End initiatives as well as from ongoing product and process simplification initiatives.

How Have Estimates Been Moving Since Then?

Following the release, investors have witnessed an upward trend in fresh estimates. There have been three revisions higher for the current quarter compared to two lower. While looking back an additional 30 days, we can see even more upward momentum.

Kennametal Inc. Price and Consensus

 

Kennametal Inc. Price and Consensus | Kennametal Inc. Quote

VGM Scores

At this time, Kennametal's stock has an average Growth Score of 'C', though it is lagging a lot on the momentum front with an 'F'. Following the exact same course, the stock was allocated also a grade of 'F' on the value side, putting it in the fifth quintile 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.

The company's stock is suitable solely for growth based on our styles scores.

Outlook

Estimates have been trending upward for the stock. The magnitude of these revisions also looks promising.  It comes with little surprise that the stock has a Zacks Rank #1 (Strong Buy). We are expecting an above average return from the stock in the next few months.

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