Writing about Kennametal (KMT) in early April, I noted that in the past these shares saw double-digit declines when the manufacturing PMI hit 60. Well, the manufacturing PMI went over 60 in April and the shares have declined about 14% since my last article, underperforming the broader industrial group by close to 20%. That comes despite two more quarters in which Kennametal posted significantly better than expected segment-level earnings and reaffirmed not only improving end-market conditions but significant operating leverage in FY’22.
I look at Kennametal as a battleground between how short-cycle stocks typically behave and what the company can do for itself in terms of delivering on past margin improvement efforts. While I do expect growth from industrial end-markets to decelerate, decelerate is not the same as contract, and Kennametal should also benefit from its exposure to longer-cycle markets like aerospace and energy, as well as cutting and wear parts used in infrastructure projects (like road and tunnel construction).
Kennametal shares now look pretty undervalued. I remain worried, though, about the short-term sentiment challenges (“sell short-cycle stocks when the PMI hits 60”), as well as longer-term challenges to the business from reduced tooling demand.
Read more here:
No comments:
Post a Comment