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Kennametal Reaches 52-Week High

Zacks Equity Research

Shares of Kennametal Inc. (KMT) touched a new 52-week high of $52.37 during the trading session on Dec 31. This is above the previous high of $52.20 reached on Dec 27.  

Kennametal’s shares closed at $52.07 at the end of trading on Dec 31, with a solid year-to-date return of 23.2%. The volume of shares traded during that session was 0.38 million. Further upside potential exists for this Zacks Rank #3 (Hold) machine tools and accessories maker as reflected in its projected earnings growth rate of 13.3% for the next five years and positive revisions in earnings estimate for fiscal 2014 and 2015.

Growth Drivers

Kennametal’s preference for accretive acquisitions and dispositions of non-core assets to expand its business has reaped success in the past and is expected to benefit in the quarters ahead as well.

Further, the acquired tungsten materials business from Allegheny Technologies in Nov 2013 is worth mentioning. The acquisition added $340 million to the company’s annual revenue and 1,175 employees. This leading producer of tungsten metallurgical powders and tooling technologies and components will enable Kennametal to generate $30–$45 million worth annual savings and will expand the company's presence in key growth sectors, including aerospace, energy and associated process industries.  

Moreover, in the near term, Kennametal anticipates to realize sales within $200–$220 million range with neutral earnings impact for the eight months of fiscal 2014. Additionally, cash tax benefits of $60–$70 million are expected to be realized during the same period.

Kennametal, over the long term, expects organic growth rate of 6%–10% (CAGR), EBIT % to be greater than or equal to 15%, earnings per share to grow 15%–20% (CAGR), capital expenditures to constitute 3%–4% of sales and free cash flow to be greater than or equal to net income. By fiscal 2017, the company hopes to double its base business to the $5–$6 billion range.

The above details were provided by Kennametal at its Analysts Day meet on Nov 6, 2013. Since then, the company’s share price rose 12.2% and earnings estimates witnessed upward revisions as well. These are discussed below.

Estimate Revisions Show Potency

Over the last 60 days, the Zacks Consensus Estimate for Kennametal advanced 0.3% to $2.97 for fiscal 2014 and 1.4% to $3.58 for fiscal 2015. Moreover, Earnings ESP for the company is currently at +4.7% and +5.0% for the fiscal year 2014 and 2015, respectively. This indicates high chances of robust performances by the company in the quarters ahead.

Kennametal currently has a market capitalization of $4.1 billion. Some better-ranked stocks in the industry include CIRCOR International, Inc. (CIR), NN Inc. (NNBR) and Flow International Corporation (FLOW). While CIRCOR and NN carry a Zacks Rank #1 (Strong Buy), Flow International has a Zacks Rank #2 (Buy).

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