Kennametal Inc. (KMT – Free Report) has failed to impress investors with its recent operational performance due to tough end-market conditions and other challenges, which are likely to hurt its earnings in the near term.
Image Source: Zacks Investment Research
The currently Zacks Rank #5 (Strong Sell) player has a market capitalization of $2.3 billion. In the past three months, the stock has lost 15.2% compared with the industry’s decline of 22.8%.
Let’s discuss the factors that might continue to take a toll on the firm.
Soft End-Market Conditions: Persistent softness in Kennametal’s transportation end market due to supply-chain restrictions, mainly because of chip unavailability, remains a reason for concern. In the fiscal third quarter of 2022 (ended Mar 31, 2022), revenues in the transportation end market decreased 7% on a year-over-year basis. However, over time, KMT anticipates a recovery in the transportation market.
Steep Costs and Expenses: KMT has been dealing with the adverse impacts of increasing cost of sales and operating expenses. The cost of sales increased 5.8% year over year while operating expenses rose 5.7% in the first nine months of fiscal 2022. In third-quarter fiscal 2022, operating income fell $13 million due to high raw material costs. For fiscal 2022 (ending Jun 30, 2022), cost inflation is likely to continue affecting its margins and profitability.
High Tax Rate: High effective tax rates remain a concern, with Kennametal predicting a 26-28% rate for fiscal 2022. The rate suggests an increase from 23.6% recorded in fiscal 2021 (ended Jun 30, 2021). This might adversely impact its earnings in the year.
Unfavorable Forex: Given its widespread presence, KMT’s performance is exposed to risks arising from geopolitical tensions, trade relations, adverse movements in foreign currencies and governmental policies. In third-quarter fiscal 2022, foreign exchange headwinds had an adverse impact of 4.6%, year over year, on the revenues of the Asia-Pacific region. Also, forex woes hampered Kennametal’s sales by 4% in the quarter.
Southbound Estimate Trend: In the past 60 days, the Zacks Consensus Estimate for KMT’s fiscal 2022 earnings has declined from $1.83 to $1.73 on five downward estimate revisions against none upward. Over the same time frame, the consensus estimate for fiscal 2023 (ending Jun 30, 2023) earnings has decreased from $2.41 to $2.11 on five downward estimate revisions against none upward.
Zacks Rank & Stocks to Consider
Some better-ranked companies from the industrial products sector are discussed below:
Applied Industrial Technologies, Inc. (AIT – Free Report) presently sports a Zacks Rank #1. AIT delivered a trailing four-quarter earnings surprise of 25.4%, on average. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
AIT’s earnings estimates have increased 5.9% for fiscal 2022 (ending June 2022) in the past 60 days. Its shares have dipped 1.8% in the past three months.
Roper Technologies, Inc. (ROP – Free Report) presently has a Zacks Rank #2 (Buy). Its earnings surprise in the last four quarters was 2%, on average.
In the past 60 days, ROP’s earnings estimates have increased 1.1% for 2022. The stock has declined 5% in the past three months.
IDEX Corporation (IEX – Free Report) is presently Zacks #2 Ranked. IEX’s earnings surprise in the last four quarters was 2.8%, on average.
In the past 60 days, the stock’s earnings estimates have increased 3.2% for 2022. The stock has declined 3.5% in the past three months.
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