Kennametal’s stock price has taken a beating over the past six months, shedding 24.6% of its value and falling to $19.29 per share. This was partly due to its softer quarterly results and may have investors wondering how to approach the situation.
Is now the time to buy Kennametal, or should you be careful about including it in your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Even with the cheaper entry price, we're swiping left on Kennametal for now. Here are three reasons why KMT doesn't excite us and a stock we'd rather own.
Why Do We Think Kennametal Will Underperform?
Involved in manufacturing hard tips of anti-tank projectiles in World War II, Kennametal (NYSE:KMT) is a provider of industrial materials and tools for various sectors.
1. Core Business Falling Behind as Demand Plateaus
In addition to reported revenue, organic revenue is a useful data point for analyzing Professional Tools and Equipment companies. 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 failed to grow its organic revenue. 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 accelerate growth, which isn’t ideal because M&A can be expensive and risky (integrations often disrupt focus). 
2. Revenue Projections Show Stormy Skies Ahead
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 drop by 2.1%, a decrease from its flat sales for the past two years. This projection doesn't excite us and implies its products and services will face some demand challenges.
3. EPS Trending Down
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
Sadly for Kennametal, its EPS declined by 7.4% annually over the last five years, more than its revenue. This tells us the company struggled because its fixed cost base made it difficult to adjust to shrinking demand.
Final Judgment
Kennametal doesn’t pass our quality test. After the recent drawdown, the stock trades at 12.7× forward price-to-earnings (or $19.29 per share). While this valuation is reasonable, we don’t see a big opportunity at the moment. There are better investments elsewhere. We’d suggest looking at a safe-and-steady industrials business benefiting from an upgrade cycle.
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