Monday, December 16, 2019

A Current AIM Small Cap Equity Holding: Kennametal Inc. (KMT, $33.83): “Kenna-METAL May Have Slippery Returns”

Kennametal Inc.  (KMT, $33.83): “Kenna-METAL May Have Slippery Returns”
By: Ronald Burgers, AIM Student at Marquette University

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) operates in manufacturing and application of ceramics, materials, and solutions used in extreme wear metal applications. They function within three segments; Industrial (54% of 2019 revenue), Infrastructure (38%), and Widia (8%).
  • KMT has revenue exposure of 42.7% in the United States, 13.2% in Germany, 10.1% in China.
  • KMT hopes to break into untapped markets with the innovation of new products.
  • KMT recently agreed to sell International Specially Alloys Inc. to AMG Advanced Metallurgical Group NV for an undisclosed amount.  
  • KMT announced a closure of four facilities as part of a restructuring plan. After tax, estimated savings from the closures are $35 million to $40 million.
Key points:

Kennametal plans on closing four faculties, including a plant in the United States, as well as two plants and a distribution center in Germany. This is part of KMT’s steps toward simplification and modernization. This is expected to enhance structural benefits and improve operational efficiency, setting them up for long-term bottom line growth. The closings are estimated to save the company nearly $35 million to $40 million after tax.

Kennametal sees growth opportunities for the industrial segment, specifically within the aerospace field, as it has grown 12% in the past year. They are also hoping to tap into new markets with the creation of Harvi Ultra 8x, a new tangential milling system.

On October 8th, 2019, KMT signed an agreement to sell certain assets to Advanced Metallurgical Group N.V. These assets carry a value of $27 million, as reported on their condensed consolidated balance sheets.

What has the stock done lately?

Over the past two months, KMT has seen an increase in value of nearly 5%. The Board of Directors declared a dividend of $0.20 per share, which is payable on November 26, 2019, to shareholders of record on November 12, 2019. The fiscal 2020 first quarter reported an EPS of $0.08, a huge decrease compared to 2019’s first quarter EPS of $0.68. This is a result from unexpected market slowdowns across all regions in engineering, energy, and transportation. Sales from the 2020 first quarter totaled $518 million, along with an operating income of $16 million. Within the past three months, KMT has seen a high and low of $35.10 and $27.62, respectfully.

Past Year Performance: 

KMT has lost value by 17% in the past year. The stock has seen a 52-week high of $43.98, and a low of $27.49. Over the past year, operating income increased 7%, and net income increased nearly 21%.

Source: FactSet

My Takeaway

KMT was added to the AIM fund in April of 2018, with a price target of $50.23. At the time, the stock was trading at $37.29. KMT experienced major losses in the past year due to market slowdowns. KMT arranged for assets totaling $27 billion to be sold to Advanced Metallurgical Group N.V., as well as plans to shut down four facilities as part of their goal to simplification/modernization of their investments. With a fairly large revenue exposure to China, and the recent talks within trade agreements with China, KMT can be exposed to a negative impact from this as well. KMT predicts adjusted earnings per share to decrease nearly $1.00 in the coming year, as well as a significant decrease in free cash flows. Due to the outlook on market factors, as well as how KMT has been performing recently, it is suggested that KMT be sold out of the AIM Fund.

Source: FactSet