Kennametal (KMT) is an industrial cyclical company recouping from a disastrous 2015 and extensive restructuring. With a turn-around well underway, the company is eager to regain peak earnings of $3.77 in FY 2012, but it will take several years to recapture these levels.
In a nutshell, KMT provides high-tech industrial consumables to manufacturers, oil & gas drilling, and underground mining. Founded outside of Pittsburgh in 1938, KMT specializes in items such as drill bits and tools for metal working. Their main product lines include cemented tungsten carbide products where wear and corrosion resistance is paramount.
In the Industrial Division, KMT focuses on customers in the transportation, general engineering, aerospace and defense market sectors, as well as the machine tool industry. In the Infrastructure Division, KMT focuses on customers in the energy and earthworks market sectors whose primary industries are oil and gas, power generation and chemicals; underground, surface and hard-rock mining; and highway construction and road maintenance.
While offering consumables provides an ongoing and consistent demand when business is expanding, the opposite is also true. Consumables then become a double edge sword – higher industrial output increases demand on items which are consumed in the manufacturing process, but slower growth subsequently cuts into demand. While the overall Industrial segment has been steadily expanding, oil and gas drilling coupled with underground mining have collapsed. The decline in mining and drilling reduced sales and overall profitability. Revenues fell from $2.8 billion in June FY 2014 to $2.0 billion in June FY 2017, reflecting this weakness.
To overcome this precipitous drop, management undertook a restructuring of its business, closing facilities and cutting employment to reflect the reality of very soft demand. After writing off $8.50 per share in restructuring costs in FY June 2015 and FY June 2016, KMT looks to have the worst behind it.
From this very low earnings base, EPS are expected to climb to $2.21 for FY 2018, $2.65 for FY 2019, and $2.92 for FY 2020.
KMT has a strong balance sheet with limited debt maturities outside of $400 million in 2019 and $300 million in 2021. In times of demand weakness, strong balance sheets are important, and KMT has excelled in managing its debt.
Kennametal is not alone in experiencing multi-year softness in its business. The company’s revenues have fared about in line with its peers. While not very comforting to investors over the past 3 years with share prices falling from almost $50 in 2014 to $15 in early 2016, shares have rebound to its current $35, and is valued about mid-range in its 52-week high/low.
Kennametal is a niche mid-cap industrial firm offering better prospects ahead. The current market weakness for both KMT’s shares and its products is easing, and long-term investors should be amply rewarded going forward. As both the energy drilling and manufacturing cycles are usually long in duration, the stabilization and improvement of end-user markets will provide a springboard for KMT to continue rewarding shareholders.
Thanks for reading. This article first appeared in the Sept 2017 issue of Guiding Mast Investments