Why Is Kennametal (KMT) Down 7.7% Since Last Earnings Report?
A month has gone by since the last earnings report for Kennametal (KMT). Shares have lost about 7.7% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Kennametal 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.
Kennametal Q3 Earnings Beat Estimates, Decline Y/Y
Kennametal delivered better-than-expected results for third-quarter fiscal 2021 (ended Mar 31, 2021). Its earnings surpassed estimates by 52.38%, whereas sales exceeded the same by 2.86%.
The machinery company’s adjusted earnings in the reported quarter were 32 cents, surpassing the Zacks Consensus Estimate of 21 cents. However, the bottom line decreased 30.4% from the year-ago figure of 46 cents as higher costs and expenses more than offset the slight increase in sales.
Revenue Details
Kennametal generated revenues of $484.7 million, increasing 0.3% year over year. Foreign currency translation had a positive impact of 2%, offset by an organic sales decline of 1% and adverse business days’ effect of 1%.
Also, the company’s top line surpassed the Zacks Consensus Estimate of $471 million.
Notably, its quarterly top line improved 10% on a sequential basis on the back of demand improvement in regions and end-markets served.
On a geographical basis, its revenues from America operations decreased 10.4% year over year to $217.2 million, whereas that from the Europe, the Middle East and Africa region increased 3.9% to $152.6 million. Sales from the Asia Pacific increased 22.4% to $114.9 million.
The company reports its results under two business segments — Metal Cutting and Infrastructure. Its segmental performance for the fiscal third quarter is briefly discussed below:
Metal Cutting revenues of $308.1 million were up 1.5% year over year. The results benefitted from foreign currency translation impacts of 3%, partially offset by a 1% adverse impact of business days. On a sequential basis, the segment’s revenues grew 9%.
Infrastructure revenues totaled $176.5 million, declining 1.7% year over year. The results were affected by a 3% decline in organic sales and a 1% adverse impact of business days. However, movements in foreign currencies had a positive impact of 2%. On a sequential basis, the segment’s revenues grew 12%.
Margin Profile
Kennametal’s cost of goods sold in the reported quarter increased 2.6% year over year to $334.5 million. It represented 69% of revenues compared with 67.5% in the year-ago quarter. Gross profit deteriorated 4.4% year over year to $150.2 million, wherein margin decreased 150 basis points (bps) to 31%. Operating expenses summed $108.1 million in the quarter under review, increasing 9.7% year over year. As a percentage of revenues, operating expenses were 22.3% compared with 20.4% a year ago.
Adjusted operating income in the reported quarter decreased 29.6% year over year to $41.6 million. Adjusted operating margin declined 360 bps year over year to 8.6%. On a sequential basis, operating margin expanded 330 bps year over year on the back of growth in sales and manufacturing productivity.
Interest expenses in the reported quarter were $20.9 million versus $7.9 million in the year-ago quarter. Adjusted effective tax rate was 20.6% in the quarter under review, down from 28.5% in the prior-year quarter.
Balance Sheet and Cash Flow
Exiting the fiscal third quarter, Kennametal’s cash and cash equivalents were $114.3 million, up 10.8% from the previous quarter’s figure of $103.2 million. Long-term debt and capital leases were down 0.4% sequentially at $591.7 million.
In the first three quarters of fiscal 2021, the company generated net cash of $139.2 million from operating activities, declining 4.7% from the previous-year comparable period. Capital invested in purchasing property, plant and equipment (net of the amount received on disposals) was $92.9 million, below $203.3 million reported in the year-ago period. Free cash flow was $46.4 million versus an outflow of $57.2 million in the first nine months of fiscal 2020.
Restructuring Actions
The company predicts annualized savings of $75 million from its restructuring actions in fiscal 2021. Pre-tax charges in the year will likely be $90-$95 million. Inception to date, the company has realized savings of $58 million (including $13 million in the third quarter of fiscal 2021) and incurred costs of $77 million (including $2 million in the reported quarter).
Outlook
In the quarters ahead, Kennametal anticipates gaining from simplification/modernization activities, solid product offerings and improving conditions in markets served. However, the adverse impacts of the pandemic and uncertainties related to constraints in the customer supply chain (related to semiconductors in the transportation market) remain concerning.
For the fiscal fourth quarter (ending June 2021), the company anticipates a mid-single-digit increase in sales on a sequential basis. Also, it predicts modest sequential improvement in adjusted operating margin.
Capital spending is expected to be $120 million for fiscal 2021.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in estimates revision. The consensus estimate has shifted 10.02% due to these changes.
VGM Scores
At this time, Kennametal has an average Growth Score of C, a grade with the same score on the momentum front. Following the exact same course, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.
Outlook
Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Kennametal has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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