Kennametal (KMT) Stock Holds Promise Despite Cost Headwinds

·3 min read

Kennametal Inc. KMT is benefiting from innovation capabilities, solid product offerings, commercial and operational excellence and a wide geographical presence. In addition, the company’s diversified customer base in various end markets enables it to avoid customer concentration risks. It expects sales of $520-$530 million, driven by continued growth in energy, aerospace, general engineering and earthworks in third-quarter fiscal 2023 (ending March 2023). The midpoint of the guided range of $525 million implies a 2.5% jump from the fiscal third-quarter 2022 figure of $512 million.

Kennametal’s Metal Cutting segment is benefiting from strength in its general engineering, transportation, aerospace and energy end markets. Also, its strong pricing actions along with improvements in customer service and labor and material productivity bode well. Strength in energy, earthworks and general engineering end markets as well as continued focus on operational excellence initiatives is supporting the Infrastructure segment’s revenues.

The company’s efforts to reward its shareholders through dividend payments and share repurchases are noteworthy. In fiscal 2022 (ended June 2022) and in the first six months of fiscal 2023 (ended December 2023), dividend distribution to its shareholders totaled $67 million and $32.4 million, respectively. It bought back shares for $85 million in fiscal 2022 and $30.1 million in the first six months of fiscal 2023. Also, in July 2021, the company’s board of directors approved a share buyback worth $200 million.

However, Kennametal is facing challenges related to the supply chain and cost woes. In the first six months of fiscal 2023, the company’s cost of sales increased 5% year over year. In second-quarter fiscal 2023, operating income suffered a $12-million blow due to headwinds from higher raw material costs. Supply-chain restrictions, mainly related to chip availability, are expected to continue impacting the transportation market in the quarters ahead.

The company has operations in the EMEA region as well as across the Americas and the Asia Pacific, which exposes it to risks arising from unfavorable movement in foreign currencies and geopolitical issues. Forex woes had an adverse impact of 8% on Kennametal’s sales in the fiscal second quarter.

In the past six months, this currently Zacks Rank #3 (Hold) stock has surged 31% compared with the industry’s 11.2% increase.

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