Weak Outlook Weighs on Kennametal - Analyst Blog

On Apr 4, 2014, we issued an updated research report on Kennametal Inc. KMT. To date, no major improvement has been recorded in the company's share price (still down by 9.5%) since the announcement of fiscal second-quarter 2014 (ended Dec 31, 2013) results on Jan 30.

Lackluster results coupled with the weak outlook for fiscal 2014 have triggered downward revisions in earnings estimates. In the last 60 days, of the 8 firms covering the stock, 3 lowered their earnings estimates for fiscal 2014, while out of 11 firms, 6 decreased their estimates for fiscal 2015. The Zacks Consensus Estimate is at $2.64 and $3.30 for fiscal 2014 and 2015, reflecting a decline of 2.6% and 2.9% respectively.   

A brief snapshot of the results and outlook is provided below:

Earnings per share in the quarter were 52 cents, roughly 15% below the Zacks Consensus Estimate. Total revenue grew 9%. The Industrial segment posted healthy results, offset by weakness in the earthworks and transportation markets that pulled down organic growth in the Infrastructure segment. Cost of revenue and operating expenses, as a percentage of total revenue, went up 150 basis points (bps) and 130 bps respectively.

Management lowered its organic revenue guidance range to 2–4% for fiscal 2014 versus the prior forecast of 4–6%, expecting slower-than-anticipated recovery in oil and gas markets and weakness in underground mining in the U.S. and China. The Infrastructure segment will remain weak due to lower volume gains.

Also, the earnings outlook was lowered to a range of $2.60–$2.75 a share versus the prior prediction of $2.90–$3.05 due to dilution expected from the acquisition of the Tungsten Materials Business (TMB), completed in Nov 2013.

Lowered earnings estimates as well as an average negative earnings surprise of 7.5% for the trailing 4 quarters have raised skepticism over Kennametal's performance in the quarter ahead. Currently, the company has an Earnings ESP of -1.39%, -1.14% and -5.15% for fiscal third-quarter 2014, fiscal 2014 and fiscal 2015 respectively.   

Kennametal currently has a market capitalization of $3.4 billion and carries a Zacks Rank #4 (Sell). Some better-ranked stocks in the industry include NN Inc. NNBR, Lincoln Electric Holdings Inc. LECO and Columbus McKinnon Corporation CMCO. While NN Inc. holds a Zacks Rank #1 (Strong Buy), Lincoln Electric Holdings and Columbus McKinnon carry a Zacks Rank #2 (Buy).