Kennametal currently trades at $34.40 per share and has shown little upside over the past six months, posting a small loss of 0.8%. The stock also fell short of the S&P 500’s 7.7% gain during that period.
Is now the time to buy Kennametal, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Is Kennametal Not Exciting?
We’re cautious about Kennametal. Here are three reasons why KMT doesn’t excite us, plus one stock we’d rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term performance is an indicator of its overall quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Over the last five years, Kennametal grew its sales at a tepid 4.6% compounded annual growth rate. This fell short of our benchmark for the industrials sector.
2. Slow Organic Growth Suggests Waning Demand In Core Business
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 1.9% year-on-year growth. This performance was underwhelming and suggests it may need to improve its products, pricing, or go-to-market strategy, which can add an extra layer of complexity to its operations. 
3. Previous Growth Initiatives Haven’t Impressed
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? 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 8.2%, somewhat low compared to the best industrials companies that consistently pump out 20%+.
Final Judgment
Kennametal’s business quality ultimately falls short of our standards. With its shares trailing the market in recent months, the stock trades at 6.2× forward P/E (or $34.40 per share). While this valuation is reasonable, we don’t really see a big opportunity at the moment. We’re pretty confident there are more exciting stocks to buy at the moment. We’d recommend looking at our favorite semiconductor picks and shovels play.
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