Kennametal (KMT)

Industrial materials and tools company Kennametal (NYSE:KMT) met Wall Street’s revenue expectations in Q1 CY2025, but sales fell by 5.7% year on year to $486.4 million. The company’s full-year revenue guidance of $1.98 billion at the midpoint came in 0.5% above analysts’ estimates. Its non-GAAP profit of $0.47 per share was 97.2% above analysts’ consensus estimates.

Company Overview

Involved in manufacturing hard tips of anti-tank projectiles in World War II, Kennametal (NYSE:KMT) is a provider of industrial materials and tools for various sectors.

Automation that increases efficiency and connected equipment that collects analyzable data have been trending, creating new demand. Some professional tools and equipment companies also provide software to accompany measurement or automated machinery, adding a stream of recurring revenues to their businesses. On the other hand, professional tools and equipment companies are 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 Xylem (NYSE:XYL), A.O. Smith (NYSE:AOS), and Watts Water (NYSE:WTS).

A company’s long-term performance is an indicator of its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Kennametal struggled to consistently generate demand over the last five years as its sales dropped at a 1.1% annual rate. This was below our standards and is a sign of poor business quality.

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. Kennametal’s annualized revenue declines of 1.6% over the last two years align with its five-year trend, suggesting its demand has consistently shrunk.

We can better understand the company’s sales dynamics by analyzing its organic revenue, which strips out one-time events like acquisitions and currency fluctuations that don’t accurately reflect its fundamentals. Over the last two years, Kennametal’s organic revenue averaged 1.2% year-on-year declines. Because this number aligns with its normal revenue growth, we can see the company’s core operations (not acquisitions and divestitures) drove most of its results.

This quarter, Kennametal reported a rather uninspiring 5.7% year-on-year revenue decline to $486.4 million of revenue, in line with Wall Street’s estimates.

Looking ahead, sell-side analysts expect revenue to remain flat over the next 12 months. While this projection suggests its newer products and services will catalyze better top-line performance, it is still below average for the sector.

Kennametal’s unit economics are better than the typical industrials business, signaling its products are somewhat differentiated through quality or brand. As you can see below, it averaged a decent 31.1% gross margin over the last five years. That means for every $100 in revenue, roughly $31.08 was left to spend on selling, marketing, R&D, and general administrative overhead.

In Q1, Kennametal produced a 32.1% gross profit margin, marking a 2.4 percentage point increase from 29.7% in the same quarter last year. Zooming out, the company’s full-year margin has remained steady over the past 12 months, 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 an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses – everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.

Kennametal has done a decent job managing its cost base over the last five years. The company has produced an average operating margin of 8.3%, higher than the broader industrials sector.

Looking at the trend in its profitability, Kennametal’s operating margin rose by 5.3 percentage points over the last five years, showing its efficiency has meaningfully improved.

This quarter, Kennametal generated an operating profit margin of 9.1%, up 2.2 percentage points year on year. Since its gross margin expanded more than its operating margin, we can infer that leverage on its cost of sales was the primary driver behind the recently higher efficiency.

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.

Sadly for Kennametal, its EPS and revenue declined by 1.7% and 1.1% annually over the last five years. We tend to steer our readers away from companies with falling revenue and EPS, where diminishing earnings could imply changing secular trends and preferences. If the tide turns unexpectedly, Kennametal’s low margin of safety could leave its stock price susceptible to large downswings.

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 Kennametal, its two-year annual EPS declines of 1.1% are similar to its five-year trend. These results were bad no matter how you slice the data.

In Q1, Kennametal reported EPS at $0.47, up from $0.30 in the same quarter last year. This print easily cleared analysts’ estimates, and shareholders should be content with the results. Over the next 12 months, Wall Street expects Kennametal’s full-year EPS of $1.50 to shrink by 19.5%.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

Kennametal has shown mediocre cash profitability over the last five years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 5.8%, subpar for an industrials business.

Taking a step back, we can see that Kennametal’s margin dropped by 1 percentage points during that time. This along with its unexciting margin put the company in a tough spot, and shareholders are likely hoping it can reverse course. If the trend continues, it could signal it’s becoming a more capital-intensive business.

Kennametal burned through $67.51 million of cash in Q1, equivalent to a negative 13.9% margin. The company’s cash flow turned negative after being positive in the same quarter last year, suggesting its historical struggles have dragged on.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Kennametal historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 7%, somewhat low compared to the best industrials companies that consistently pump out 20%+.

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, Kennametal’s ROIC increased by 1.9 percentage points annually over the last few years. This is a good sign, and we hope the company can continue improving.

Kennametal reported $97.47 million of cash and $609.1 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 $329.6 million of EBITDA over the last 12 months, we view Kennametal’s 1.6× net-debt-to-EBITDA ratio as safe. We also see its $12.53 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 Kennametal blew past analysts’ EPS expectations this quarter. We were also glad its full-year EPS guidance trumped Wall Street’s estimates. On the other hand, its revenue was in line. Overall, we think this was still a solid quarter with some key areas of upside. The stock traded up 6.5% to $21.09 immediately following the results.

Updated: May 21, 2025 at 11:32 PM EDT

When considering an investment in Kennametal, investors should account for its valuation and business qualities as well as what’s happened in the latest quarter.

Kennametal falls short of our quality standards. To kick things off, its revenue has declined over the last five years. And while its expanding operating margin shows the business has become more efficient, the downside is its projected EPS for the next year is lacking. On top of that, its declining EPS over the last five years makes it a less attractive asset to the public markets.

Kennametal’s P/E ratio based on the next 12 months is 17.6x. This valuation is reasonable, but the company’s shaky fundamentals present too much downside risk. There are better investments elsewhere.

Wall Street analysts have a consensus one-year price target of $21.81 on the company (compared to the current share price of $21.23).

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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