Kadant (KAI)

Industrial equipment manufacturer Kadant (NYSE:KAI) reported Q3 CY2025 results topping the market’s revenue expectations, but sales were flat year on year at $271.6 million. Revenue guidance for the full year exceeded analysts’ estimates, but next quarter’s guidance of $275 million was less impressive, coming in 1.6% below expectations. Its non-GAAP profit of $2.59 per share was 19.7% above analysts’ consensus estimates.

Company Overview

Headquartered in Massachusetts, Kadant (NYSE:KAI) is a global supplier of high-value, critical components and engineered systems used in process industries worldwide.

Automation that increases efficiency and connected equipment that collects analyzable data have been trending, creating new demand for general industrial machinery companies. Those who innovate and create digitized solutions can spur sales and speed up replacement cycles, but all general industrial machinery companies are still at the whim of economic cycles. Consumer spending and interest rates, for example, can greatly impact the industrial production that drives demand for these companies’ offerings.

Competitors offering similar products include Albany (NYSE:AIN), RBC Bearings (NYSE:RBC), and Valmet (HEL:VALMT)

Examining a company’s long-term performance can provide clues about its quality. Any business can have short-term success, but a top-tier one grows for years. Luckily, Kadant’s sales grew at a solid 9.5% compounded annual growth rate over the last five years. Its growth beat the average industrials company and shows its offerings resonate with customers.

We at StockStory place the most emphasis on long-term growth, but within industrials, a half-decade historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. Kadant’s recent performance shows its demand has slowed as its annualized revenue growth of 3.8% over the last two years was below its five-year trend.

Kadant also breaks out the revenue for its three most important segments: Fluid Handling, Industrial Processing, and Material Handling, which are 34.9%, 39.2%, and 25.9% of revenue. Over the last two years, Kadant’s revenues in all three segments increased. Its Fluid Handling revenue (piping, cleaning, and filtration) averaged year-on-year growth of 1.6% while its Industrial Processing (paper and timber processing equipment) and Material Handling (wood production equipment) revenues averaged 6.1% and 6.2%.

This quarter, Kadant’s $271.6 million of revenue was flat year on year but beat Wall Street’s estimates by 4.2%. Company management is currently guiding for a 6.6% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 6.8% over the next 12 months. Although this projection indicates its newer products and services will fuel better top-line performance, it is still below the sector average.

Cost of sales for an industrials business is usually comprised of the direct labor, raw materials, and supplies needed to offer a product or service. These costs can be impacted by inflation and supply chain dynamics.

Kadant has best-in-class unit economics for an industrials company, enabling it to invest in areas such as research and development. Its margin also signals it sells differentiated products, not commodities. As you can see below, it averaged an elite 44.1% gross margin over the last five years. Said differently, roughly $44.06 was left to spend on selling, marketing, R&D, and general administrative overhead for every $100 in revenue.

Kadant’s gross profit margin came in at 45.2% this quarter, in line with the same quarter last year. On a wider time horizon, the company’s full-year margin has remained steady over the past four quarters, suggesting its input costs (such as raw materials and manufacturing expenses) have been stable and it isn’t under pressure to lower prices.

Operating margin is a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.

Kadant’s operating margin might fluctuated slightly over the last 12 months but has remained more or less the same, averaging 16.5% over the last five years. This profitability was elite for an industrials business thanks to its efficient cost structure and economies of scale. This result isn’t surprising as its high gross margin gives it a favorable starting point.

Analyzing the trend in its profitability, Kadant’s operating margin might fluctuated slightly but has generally stayed the same over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability.

This quarter, Kadant generated an operating margin profit margin of 15.7%, down 2.3 percentage points year on year. Since Kadant’s operating margin decreased more than its gross margin, we can assume it was less efficient because expenses such as marketing, R&D, and administrative overhead increased.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Kadant’s EPS grew at a remarkable 14.1% compounded annual growth rate over the last five years, higher than its 9.5% annualized revenue growth. This tells us the company became more profitable on a per-share basis as it expanded.

Like with revenue, we analyze EPS over a more recent period because it can provide insight into an emerging theme or development for the business.

For Kadant, its two-year annual EPS declines of 3.6% mark a reversal from its (seemingly) healthy five-year trend. We hope Kadant can return to earnings growth in the future.

In Q3, Kadant reported adjusted EPS of $2.59, down from $2.84 in the same quarter last year. Despite falling year on year, this print easily cleared analysts’ estimates. Over the next 12 months, Wall Street expects Kadant’s full-year EPS of $9.25 to grow 5.8%.

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

Kadant has shown terrific cash profitability, putting it in an advantageous position to invest in new products, return capital to investors, and consolidate the market during industry downturns. The company’s free cash flow margin was among the best in the industrials sector, averaging 13.6% over the last five years.

Taking a step back, we can see that Kadant’s margin dropped by 3.7 percentage points during that time. If its declines continue, it could signal increasing investment needs and capital intensity.

Kadant’s free cash flow clocked in at $44.06 million in Q3, equivalent to a 16.2% margin. The company’s cash profitability regressed as it was 1.6 percentage points lower than in the same quarter last year, but it’s still above its five-year average. We wouldn’t read too much into this quarter’s decline because investment needs can be seasonal, causing short-term swings. Long-term trends carry greater meaning.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Although Kadant hasn’t been the highest-quality company lately, it historically found a few growth initiatives that worked. Its five-year average ROIC was 13.3%, higher than most industrials businesses.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. On average, Kadant’s ROIC decreased by 3.6 percentage points annually over the last few years. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.

Kadant reported $126.9 million of cash and $258 million of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $210.8 million of EBITDA over the last 12 months, we view Kadant’s 0.6× net-debt-to-EBITDA ratio as safe. We also see its $7.60 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

We were impressed by how significantly Kadant blew past analysts’ revenue, EPS, and EBITDA expectations this quarter. On the other hand, its revenue and EPS guidance for next quarter fell short of Wall Street’s estimates. Overall, we think this was a mixed quarter. The stock remained flat at $299 immediately following the results.

Updated: December 4, 2025 at 10:08 PM EST

The latest quarterly earnings matters, sure, but we actually think longer-term fundamentals and valuation matter more. Investors should consider all these pieces before deciding whether or not to invest in Kadant.

Kadant isn’t a terrible business, but it doesn’t pass our bar. Although its revenue growth was solid over the last five years and is expected to accelerate over the next 12 months, its cash profitability fell over the last five years. And while the company’s admirable gross margins indicate the mission-critical nature of its offerings, the downside is its diminishing returns show management's prior bets haven't worked out.

Kadant’s P/E ratio based on the next 12 months is 29.5x. Investors with a higher risk tolerance might like the company, but we think the potential downside is too great. We're fairly confident there are better investments elsewhere.

Wall Street analysts have a consensus one-year price target of $338.33 on the company (compared to the current share price of $290.97).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.