Wednesday, January 2, 2019

An Existing AIM Holding: Kennametal, Inc. (KMT, $36.23): “Observing the Core of the Metal: Kennametal Remains Strong” By: Charlie Maleki, AIM Student at Marquette University

Kennametal, Inc. (KMT, $36.23): “Observing the Core of the Metal: Kennametal Remains Strong”
By: Charlie Maleki, AIM Student at Marquette University

Image result for kennametal
Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.


Kennametal, Inc. (NYSE:KMT) supplies tooling, engineered components and materials in the production process through two segments: Industrial and Infrastructure.
• Prime end-markets should continue to provide KMT with a strong tailwind for revenue growth into the future.
• KMT’s restructuring initiatives should save roughly $10 million pre-tax over the first half of the 2019 fiscal year.
• KMT is currently undervalued compared to their sector peers, but increase in insider selling gives a slight reason for caution.
• Since being added to the AIM fund, KMT has seen a slight dip in value or 3.5%, however, the thesis remains strong and the stock should begin to move towards their target price of ~50$.

Key points: Kennametal remains 'in-play'. Since the industrial market as a whole has begun to slow in regards to growth, KMT has stalled with it. However, the company still believes that sturdy demand from their prime end-markets (such as aerospace, automotive, and machine tool) will continue to drive revenue growth in the upcoming quarters.

Kennametal also began different restructuring initiatives that were carried out during their 2018 fiscal year. These moves created ~$2 million in pre-tax savings for the first quarter of 2019. Annualized pre-tax savings should be ~$10 million in the first half of 2019 alone.

Kennametal is currently undervalued based on many different valuation metrics when compared to their industry competitors. KMT currently has a Price/Earnings of 14.6 versus the sector average of 20.9. They also currently have a Price/Sales of 1.24 versus the sector average of 1.7.

One red flag for Kennametal is the recent increase in insiders selling the stock. Specifically, VP and Chief of Human Resources & Corporate Relations Officer Judith Bacchus has ditched $214k worth of shares over the last three months. This is not a perfect teller of a future negative trend for KMT, but it provides investors with a reason to be slightly cautious moving forward.

What has the stock done lately?
Since KMT was added to the AIM fund on May 2, 2018, the stock has dropped 3.5% from $37.55 to $36.23. Most of the downside KMT has experienced over the last year has been avoided. Their strong operational success coupled with potential positive catalysts should breathe life into KMT pushing it to reach its projected target price near $50.

Past Year Performance: AIG has decreased ~25% in value over the past year, making KMT a great bargain for any potential investors as the solid fundamental situation of the company has not changed. The thesis presented within the AIM class of 2019 is still very much in play providing a cheap opportunity for growth.

Source: Google Finance

My Takeaway
Kennametal remains a strong fundamental firm that should play a large roll in continuing to grow the industrials sector of the AIM Equity Fund. While they have experienced a slight loss in value recently, they have still proven to be more resilient to down markets than the majority of their competitors. KMT’s management continues to believe they have a plethora of opportunities for growth and will continue to introduce new initiatives to take advantage of these opportunities moving into the future.