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Kennametal's (KMT) Near-Term Prospects Bleak on Pandemic Woes

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Zacks Equity Research
·4 min read
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Kennametal Inc. KMT seems to have lost its sheen due to the adverse impacts of the coronavirus outbreak on its operations. Also, restructuring charges and forex woes are concerning for the company. Notably, weak price performance and lowered earnings estimates indicate bearish sentiments for the stock.

The company has a market capitalization of $1.9 billion and a Zacks Rank #4 (Sell) at present. It belongs to the Zacks Manufacturing – Tools & Related Products industry, currently at the bottom 7% (with the rank of 237) of more than 250 Zacks industries.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

We believe that the industry is suffering from global uncertainties due to the pandemic, unfavorable movements in foreign currencies, softness in industrial production in the United States and strained trade relations due to tariffs.

Notably, Kennametal’s earnings surpassed estimates by 43.75% in third-quarter fiscal 2020 (ended Mar 31, 2020). However, sales lagged estimates by 5.74% and declined 19% year over year.

In the past three months, the company’s shares have fallen 17.9% compared with the industry’s decline of 22.9%.

Factors Affecting Investment Appeal

Pandemic-Related Woes: Kennametal suffered from the adverse impacts of the pandemic in third-quarter fiscal 2020, as is evident from a decline in organic sales of its three segments — Industrial, WIDIA and Infrastructure. The company expects the pandemic-related uncertainties to continue impacting its operations and end markets.

For fiscal 2020, it suspended its previously provided financial projections. Notably, the company earlier expected an organic sales decline of 9-12% for fiscal 2020. Adjusted earnings per share were expected to be $1.20-$1.50.

High Debts & Woes Related to International Presence: A highly leveraged balance sheet might increase financial obligations and hurt the profitability of the company. Kennametal’s long-term debts grew 0.1% sequentially to $593.6 million at the end of the third quarter of fiscal 2020.

We find the company’s ability to repay its financial obligations (and not its debts) more concerning for now. Notably, its cash and cash equivalents were just $85.2 million at the third-quarter end. The balance reflected a sequential fall of 19%. In addition, the company’s times interest earned weakened sequentially from 4.6x to 3.2x at the end of the third quarter.

Also, operations in Africa, the Americas, Europe, the Asia Pacific and the Middle East have exposed the company to geopolitical issues, macroeconomic challenges and unfavorable movements in foreign currencies. Forex woes adversely impacted the company’s sales by 1% and earnings per share by 3 cents in the third quarter.

Charges Related to Restructuring Initiatives: Kennametal’s operating margin suffered from the adverse impacts of simplification/modernization actions in the third quarter of fiscal 2020. Also, the initiatives lowered the quarter’s earnings by 6 cents per share.

For fiscal 2020, the company expects to incur pre-tax charges of $55-$60 million from restructuring moves announced in July 2019. Also, pre-tax charges will likely be $55-$65 million for fiscal 2021 (ending June 2021).

Bottom-Line Estimate Trend: The Zacks Consensus Estimate for Kennametal’s earnings has moved downward in the past 30 days. The consensus estimate for earnings is currently pegged at 13 cents for fourth-quarter fiscal 2020 (ending June 2020) and 7 cents for first-quarter fiscal 2021 (ending September 2020), reflecting declines of 35% and 50% from the 30-day-ago figures.

Kennametal Inc. Price and Consensus


Kennametal Inc. Price and Consensus
Kennametal Inc. Price and Consensus

Kennametal Inc. price-consensus-chart | Kennametal Inc. Quote

Further, the consensus estimate at 92 cents per share for fiscal 2020 reflects growth of 16.5%, while the same is pegged at $1.20 for fiscal 2021, suggesting a decline of 9.8% from the 30-day-ago numbers.

Kennametal’s Performance Versus Three Peers

The company has underperformed three peers in the past three months. Three such stocks are Lincoln Electric Holdings, Inc. LECO, Sandvik AB SDVKY and IDEX Corporation IEX, with respective three-month declines of 12.5%, 16.7% and 10.9%.

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Lincoln Electric Holdings, Inc. (LECO) : Free Stock Analysis Report
Kennametal Inc. (KMT) : Free Stock Analysis Report
Sandvik AB (SDVKY) : Free Stock Analysis Report
IDEX Corporation (IEX) : Free Stock Analysis Report
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