Kennametal has had an impressive run over the past six months as its shares have beaten the S&P 500 by 24.9%. The stock now trades at $33.28, marking a 36.2% gain. This was partly thanks to its solid quarterly results, and the run-up might have investors contemplating their next move.
Is now the time to buy Kennametal, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Do We Think Kennametal Will Underperform?
We’re glad investors have benefited from the price increase, but we're swiping left on Kennametal for now. Here are three reasons you should be careful with KMT and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
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. Over the last five years, Kennametal grew its sales at a sluggish 2.3% compounded annual growth rate. This fell short of our benchmarks.
2. Core Business Falling Behind as Demand Declines
We can better understand Professional Tools and Equipment companies by analyzing their organic revenue. This metric gives visibility into Kennametal’s core business because it excludes one-time events such as mergers, acquisitions, and divestitures along with foreign currency fluctuations - non-fundamental factors that can manipulate the income statement.
Over the last two years, Kennametal’s organic revenue averaged 2.3% year-on-year declines. This performance was underwhelming and implies it may need to improve its products, pricing, or go-to-market strategy. It also suggests Kennametal might have to lean into acquisitions to grow, which isn’t ideal because M&A can be expensive and risky (integrations often disrupt focus). 
3. EPS Took a Dip Over the Last Two Years
Although long-term earnings trends give us the big picture, we like to analyze EPS over a shorter period to see if we are missing a change in the business.
Sadly for Kennametal, its EPS declined by more than its revenue over the last two years, dropping 4.7%. This tells us the company struggled to adjust to shrinking demand.
Final Judgment
We cheer for all companies making their customers lives easier, but in the case of Kennametal, we’ll be cheering from the sidelines. With its shares beating the market recently, the stock trades at 18.8× forward P/E (or $33.28 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. There are superior stocks to buy right now. Let us point you toward a fast-growing restaurant franchise with an A+ ranch dressing sauce.
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