This is a tough time in the cycle for stocks like Kennametal (KMT). As I mentioned in my last article on this metalworking tools and components company, these shares are in a group of shorter-cycle industrials (including Gates (GTES), 3M (MMM), and Parker Hannifin (PH)) that tend to underperform when the PMI goes above 60. That happened back in April, and all of these stocks have lagged the broader industrial space since then, with Kennametal being among the weakest of the group.
Still, I wonder if the market has overshot the mark and whether fundamental performance can drive a second look. I am concerned about a slowdown from here in shorter-cycle business, but autos should be recovering from here, aero and energy are just starting their recoveries, and Kennametal's earthworks business should fare well with improving greenfield mining activity and upcoming infrastructure work.
I don't love Kennametal, and I'll discuss why a little later, but the valuation has drifted to a "yes, but …" point where I'm starting to see more opportunities in a stock that the sell-side doesn't like all that much.
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