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Kennametal (KMT) Displays Bright Prospects, Headwinds Remain

On Sep 25, we issued an updated research report on Kennametal Inc. KMT.

In the past three months, this Zacks Rank #3 (Hold) stock has lost 0.2% compared with the industry’s decline of 3.8%.

Present Scenario

Kennametal stands to benefit from its innovation capabilities, solid product offerings and diversified customer base in various end markets in the quarters ahead. Also, its ongoing cost-saving actions, including reduction of salaried employees’ compensation by 10-20% and a 20% reduction in cash compensation for the board of directors will help in dealing with the coronavirus-induced woes.

Further, Kennametal’s three initiatives — growth, modernization and simplification — are likely to be beneficial. Its growth initiative is directed toward boosting its sales through improvement in commercial execution. Its simplification initiative is improving operational efficiency and reducing costs, while the modernization initiative is contributing to strong operating leverage. For fiscal 2021 (ending June 2021), it anticipates savings of $65-$75 million from these initiatives, higher than $25-$30 million expected earlier. In addition, it remains committed to rewarding shareholders handsomely through dividend payments. Notably, in fiscal 2020 (ended June 2020), the company used $66 million for paying out dividends.  

However, Kennametal remains wary of the pandemic-related uncertainties in the quarters ahead, and hence has refrained from providing financial projections for fiscal 2021. Also, the company’s high-debt profile poses a concern. Its long-term debt was $594.1 million at the end of the fiscal fourth quarter, reflecting a marginal increase sequentially. Its ability to repay its financial obligations are concerning presently. Notably, its times interest earned was 1.1x exiting the fourth quarter, lower than 3.2x in the previous quarter.

Further, it is exposed to risks associated with geopolitical issues, unfavorable movements in foreign currencies and others on account of its presence in international markets. Notably, in fourth-quarter fiscal 2020, forex woes had an adverse impact of 2% on the company’s sales.

Key Picks

Some better-ranked companies from the Zacks Industrial Products sector are Tennant Company TNC, Altra Industrial Motion Corp. AIMC and Dover Corporation DOV. While Tennant currently sports a Zacks Rank #1 (Strong Buy), Altra Industrial and Dover carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Tennant delivered a positive earnings surprise of 107.12%, on average, in the trailing four quarters.

Altra Industrial delivered a positive earnings surprise of 31.43%, on average, in the trailing four quarters.

Dover delivered a positive earnings surprise of 13.71%, on average, in the trailing four quarters.

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Dover Corporation (DOV) : Free Stock Analysis Report
 
Kennametal Inc. (KMT) : Free Stock Analysis Report
 
Altra Industrial Motion Corp. (AIMC) : Free Stock Analysis Report
 
Tennant Company (TNC) : Free Stock Analysis Report
 
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