Even though Kennametal (currently trading at $22.77 per share) has gained 17.7% over the last six months, it has lagged the S&P 500’s 24.4% return during that period. This was partly driven by its softer quarterly results and might have investors contemplating their next move.
Is now the time to buy Kennametal, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free for active Edge members.
Why Do We Think Kennametal Will Underperform?
We don't have much confidence in Kennametal. Here are three reasons you should be careful with KMT and a stock we'd rather own.
1. Core Business Falling Behind as Demand Declines
We can better understand Professional Tools and Equipment companies by analyzing their organic revenue. This metric gives visibility into Kennametal’s core business because it excludes one-time events such as mergers, acquisitions, and divestitures along with foreign currency fluctuations - non-fundamental factors that can manipulate the income statement.
Over the last two years, Kennametal’s organic revenue averaged 2.7% year-on-year declines. This performance was underwhelming and implies it may need to improve its products, pricing, or go-to-market strategy. It also suggests Kennametal might have to lean into acquisitions to grow, which isn’t ideal because M&A can be expensive and risky (integrations often disrupt focus). 
2. Projected Revenue Growth Is Slim
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Kennametal’s revenue to rise by 1.6%. While this projection indicates its newer products and services will spur better top-line performance, it is still below the sector average.
3. EPS Barely Growing
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
Kennametal’s EPS grew at an unimpressive 7.3% compounded annual growth rate over the last five years. On the bright side, this performance was better than its flat revenue and tells us management responded to softer demand by adapting its cost structure.
Final Judgment
We see the value of companies helping their customers, but in the case of Kennametal, we’re out. With its shares lagging the market recently, the stock trades at 21.3× forward P/E (or $22.77 per share). This valuation is reasonable, but the company’s shaky fundamentals present too much downside risk. There are better stocks to buy right now. We’d suggest looking at one of Charlie Munger’s all-time favorite businesses.
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