Kennametal (KMT) Draws Interest On Manufacturing Strength, Is The Stock Above Fair Value?
Fresh interest in Kennametal (KMT) has been sparked by industry research pointing to strength in manufacturing, as well as by the company’s recent project wins in aerospace and energy, along with consistently above-expectation quarterly results.
Over the past year Kennametal’s share price has been resilient, with a year to date share price return of 1.6% and a 1 year total shareholder return of 40.7%. This is despite the 30 day share price return being down 15.6% and the 90 day share price return being down 10.5%, which suggests recent profit taking after a strong run as investors reassess the balance between growth potential and risk.
Compare Kennametal’s setup with other industrials by scanning our curated list of list of solid balance sheet and fundamentals (52 results) that may also be positioned for manufacturing strength.
The pullback has given back a chunk of Kennametal’s recent gains, while its longer-term return profile remains strong. Is this a reasonable entry after a cooldown, or does it still make sense to wait for cheaper levels based on valuation?
Most Popular Narrative: 9.1% Overvalued
Based on the most followed narrative, Kennametal’s fair value of $27 sits below the last close of $29.45, which places the recent pullback in a different light.
Restructuring actions, facility consolidations and employment cost reductions are providing about US$35 million of expected annual savings. Once these are fully realized, earnings growth will depend more on volume and mix in markets that management itself describes as only slightly improving, which could cap future EPS growth if end markets stall.
Want to see what really drives that $27 figure? The narrative leans heavily on specific revenue growth paths, slimmer margins and a lower future earnings multiple. The mix of higher sales assumptions and reduced profitability is not obvious from the headline numbers. The full narrative spells out how those moving parts interact to underpin its fair value call.
Result: Fair Value of $27 (OVERVALUED)
Have a read of the narrative in full and understand what's behind the forecasts.
However, there is still a clear risk to this bearish Kennametal narrative if aerospace, defense and Earthworks projects win support and deliver stronger volumes than cautious analysts expect.
Find out about the key risks to this Kennametal narrative.
Another View on Kennametal’s Valuation
The bearish fair value of $27 suggests Kennametal is 9.1% overvalued. Yet on current numbers the stock trades on a P/E of 6.6x versus 25.7x for the US Machinery industry and 36.4x for peers, while the fair ratio points to 10.3x. Is the market underpricing the earnings power, or correctly discounting future pressure on profits?
That is where a closer look at the earnings multiple and its gap to both peers and the fair ratio can help you judge whether this discount represents a margin of safety or a sign that investors see real risk in those forecasts. See what the numbers say about this price — find out in our valuation breakdown.
Next Steps
With sentiment on Kennametal looking mixed, this is a moment to move quickly, test the numbers yourself and decide where you stand on the balance of risk and upside. To frame that view, take a close look at the 4 key rewards and 4 important warning signs.
Looking for more Kennametal investment ideas?
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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