Kennametal May Return To Growth This Quarter, But The Longer-Term Opportunity Isn't So Exciting

 

Short-cycle industrial markets are definitely in recovery mode now, and that has driven a much improved outlook for companies leveraged primarily to shorter-cycle markets, including Kennametal (KMT). Kennametal also has the advantage of an ongoing restructuring initiative that actually seems to be bearing fruit after numerous less successful restructuring attempts in years past, and between cyclical recoveries and self-improvement, double-digit operating margins don't seem too far away.

My feelings on Kennametal were decidedly mixed when I wrote about the company in May. While I did believe the shares were undervalued on near-term recovery potential, the weaker long-term outlook tempered my enthusiasm and I preferred other short-cycle names like Parker-Hannifin (PH) and Columbus McKinnon (CMCO). Since then, Kennametal has outperformed the S&P 500 and the broader industrial space, rising almost 70%, but Parker and Columbus McKinnon have done better still.

I'm still not looking to add Kennametal as a long-term holding. I'm a little more bullish on the likelihood of management hitting its restructuring-driven margin goals, and I'm looking for a 30% trough-to-peak revenue improvement that could still leave upside (a 50% move is possible), but I have longer-term structural and competitive concerns here, and I think getting to double-digit FCF margins, let alone beyond that, is going to be challenging.

 

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Kennametal May Return To Growth This Quarter, But The Longer-Term Opportunity Isn't So Exciting