Stock to Avoid: Kennametal Inc. - Analyst Blog

Zacks Investment Research downgraded Kennametal Inc. KMT to a Zacks Rank #5 (Strong Sell) on Apr 1, 2014. Going by the Zacks model, companies holding a Zacks Rank #5 have strong chances of underperforming worse than the broader market.

Why the Downgrade?

Kennametal's lackluster fiscal second-quarter 2014 (ended Dec 31, 2013) results as well as guidance for fiscal 2014 failed to impress its shareholders. The company's share price went down roughly 7.0% on Jan 30. Also, the disappointing results and outlook have triggered downward revisions in earnings estimates.

A snapshot of Kennametal's fiscal second-quarter 2014 results and outlook are provided below:

Adjusted earnings per share were 52 cents, short of the Zacks Consensus Estimate of 61 cents. However, bottom-line results managed to surpass the year-ago earnings of 50 cents. The 9% year-over-year revenue growth was attributable to a 2% hike in organic revenues and a 7% gain from the acquisition of Tungsten Materials Business (TMB) from ATI in Nov 2013.

The top-line growth was partially offset by an 11.4% increase in cost of sales. Operating expenses, as a percentage of total revenue, grew 130 basis points year over year. Kennametal's cash balance at the end of the quarter was down 51% while long-term debt increased 47% sequentially.

For fiscal 2014, Kennametal lowered its organic revenue growth guidance to a range of 2−4% from 4−6% expected earlier. The revision accounts for lower-than-anticipated growth in the oil and gas markets served by the company and continued weakness in underground mining in the U.S. and China. Earnings per share guidance has been lowered to a range of $2.60–$2.75 from $2.90–$3.05 expected earlier.

In the last 60 days, the Zacks Consensus Estimate for Kennametal has decreased 10.8% to $2.65 for fiscal 2014 and by 7.0% to $3.33 for fiscal 2015. Lowered earnings estimates as well as a negative average earnings surprise of 7.5% have made us dubious about the company's performance in the years ahead. Currently, the company has an Earnings ESP of -0.38% and -0.90% for fiscal 2014 and fiscal 2015 respectively.   
 
Other Stocks to Consider

Kennametal currently has a market capitalization of $3.5 billion. Other stocks to watch out for in the industry include NN Inc. NNBR, Lincoln Electric Holdings Inc. LECO and The Manitowoc Company, Inc. MTW. While NN Inc. holds a Zacks Rank #1 (Strong Buy), Lincoln Electric Holdings and Manitowoc Company carry a Zacks Rank #2 (Buy).