A month has gone by since the last earnings report for Kennametal (
KMT Quick Quote KMT - Free Report) . Shares have lost about 11.3% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Kennametal due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.
Kennametal Q1 Earnings Beat Estimates, Sales Miss
Kennametal delivered mixed results for first-quarter fiscal 2022 (ended Sep 30, 2021), with earnings surpassing estimates by 18.92%. Sales in the quarter lagged estimates by 0.49%.
The machinery company’s adjusted earnings in the reported quarter were 44 cents, surpassing the Zacks Consensus Estimate of 37 cents. Also, the bottom line improved from earnings of 3 cents recorded in the year-ago quarter on the back of sales growth, margin improvement and lower taxes. Revenue Details
Kennametal generated revenues of $483.5 million, increasing 20.8% year over year. Foreign currency translation had a positive impact of 2%, while organic sales growth added 19%. The improvement was backed by healthy segmental businesses.
Its quarterly top line decreased 6% on a sequential basis. The company’s top line lagged the Zacks Consensus Estimate of $486 million. On a geographical basis, its revenues from America operations increased 25.7% year over year to $225.7 million, whereas that from the Europe, the Middle East and Africa region grew 20.8% to $148.3 million. Sales from the Asia Pacific increased 11.8% to $109.4 million. The company reports results under two business segments — Metal Cutting and Infrastructure. Its segmental performance for the fiscal first quarter is briefly discussed below: Metal Cutting revenues of $298.4 million were up 20% year over year. The results benefitted from foreign currency translation impacts of 2% and organic sales growth of 19%. Business days had an adverse impact of 1%. Infrastructure revenues totaled $185.1 million, increasing 21% year over year. The results gained from 19% growth in organic sales and a 3% positive impact of foreign currency movements. However, business days adversely impacted results by 1%. Margin Profile
Kennametal’s cost of goods sold in the reported quarter increased 9.3% year over year to $322.8 million. It represented 66.8% of revenues compared with 73.8% in the year-ago quarter. Gross profit grew 53% year over year to $160.8 million, wherein margin increased 700 basis points (bps) to 33.3%. Operating expenses summed $102.7 million in the quarter under review, increasing 10% year over year. As a percentage of revenues, operating expenses were 21.2% compared with 23.3% a year ago.
Adjusted operating income in the reported quarter increased 388% year over year to $55.9 million. Adjusted operating margin expanded 870 bps year over year to 11.6%. Interest expenses in the reported quarter were $6.3 million versus $10.6 million in the year-ago quarter. The adjusted effective tax rate was 26.9% in the quarter under review, down from 33.4% in the prior-year quarter. Balance Sheet and Cash Flow
Exiting the fiscal first quarter, Kennametal’s cash and cash equivalents were $107.3 million, down 30.3% from the previous quarter’s figure of $154 million. Long-term debt and capital leases were up 0.1% sequentially at $592.5 million.
In the fiscal first quarter, the company generated net cash of $15.8 million from operating activities, rising 64.2% from the previous-year quarter. Capital invested in purchasing property, plant and equipment (net of the amount received on disposals) was $17.5 million, below $39 million reported in the year-ago quarter. Free cash outflow was $1.6 million against an outflow of $29.4 million in the previous-year quarter. In the quarter, the company’s dividend payments totaled $16.7 million and it repurchased shares worth $12.9 million. Outlook
For the second quarter of fiscal 2022 (ending December 2021), the company anticipates sales of $480-$500 million, suggesting a year-over-year increase of 9-14%. On a sequential basis, the mid-point of $490 million indicates growth of 1.3%.
Cost controls in the prior-year quarters are predicted to create $10 million of cost headwinds — including depreciation expense, price/raw materials, and merit increases — in the second quarter of fiscal 2022. Adjusted operating income for the quarter is anticipated to be greater than $46 million and the adjusted tax rate is anticipated to be 25-28%. Free cash flow is expected to be positive. Kennametal anticipates gaining from solid operating leverage in fiscal 2022 (ending June 2022). The adjusted effective tax rate is expected to be 25-28%, higher than 23.6% in fiscal 2021. Cost headwinds related to control measures taken in the previous year are predicted to be $25 million in the first half of fiscal 2022. Capital spending is expected to be $110-$130 million and free cash flow is likely to be 100% of net income. How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in estimates revision. The consensus estimate has shifted -10.26% due to these changes.
At this time, Kennametal has a strong Growth Score of A, though it is lagging a bit on the Momentum Score front with a B. Following the exact same course, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Kennametal has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.