One of the oldest U.S.-based companies you’ve probably never heard of is Kennametal (NYSE: KMT). Founded in 1938 as a company focused on tungsten carbide technology, the company has grown slowly to about $ 2. billion companies. Over the years, the company has transformed, focusing on products used by customers in the aerospace, earthmoving, energy, general engineering, transportation and other similar markets. Over the past two years, the company’s financial performance has been pretty tough due to the COVID-19 pandemic. But the results experienced so far for fiscal year 2022 are encouraging. Given how cheap stocks look in relation to similar players and the company’s trajectory so far this year, I can’t help but rate the business as a soft “buy” right now.
A niche business that trades at low cost
The best way to understand Kennametal is to analyze the company based on its two individual segments. First, we have a segment called Metal Cutting. With this, the company produces and sells high-performance metal tooling and cutting products. The products here include milling systems, holes, turning, threading and tools that are used in the manufacture of rifles, aerodynamic engines, trucks, other related automobiles, ships and even industrial equipment. Brands with which the company sells them include Kennametal, WIDIA and more. The company also offers services related to these products, such as carbide recycling, the supply of its ToolBOSS machine vending machines and reconditioning services. During the company’s 2021 fiscal year, this segment accounted for 62.5% of the company’s revenue but 43.5% of its profits.
The other segment is called Infrastructure. With this, the company produces designed ceramic and tungsten carbide components, ground cutting tools and advanced metallurgical powders. They are typically used for final energy markets, earthmoving and general engineering. Examples of products include nozzles, fracture seats, rod spaces, and more. Most of these products are sold through a direct sales force and through distributors that the company has, all under the Kennametal name. Last year, this segment accounted for 37.5% of the company’s revenue and an impressive 56.5% of profits. It is worth noting that, although the company is headquartered in the US, an impressive 62% of its revenue comes from markets outside the country, with a significant presence in places such as Western Europe, China and India.
In the years leading up to the COVID-19 pandemic, Kennametal’s management team had done a good job growing the company’s main line. Revenue rose from $ 2.60 billion in 2017 to $ 2.38 billion in 2019. In 2020, the COVID-19 pandemic caused revenue to plummet to $ 1.890 billion. And, unfortunately, revenue fell further in 2021, to $ 1.48 billion during the year. The reason for this continued decline is the time of the end of the company’s fiscal year. The end of a fiscal year for the company is June 30 of each year, so technically the fiscal year 2021 is over as the economy was still beginning to reopen. The good news is that financial performance has since been positive. In the first three quarters of the company’s fiscal year 2022, revenue amounted to $ 1.48 billion. This is an increase of 11.8% over the $ 1.33 billion generated a year earlier.
All in all, things have been volatile from year to year. After seeing net revenues soar from $ 49.1 million in 2017 to $ 241.9 million in 2019, the company generated a loss of $ 5.7 million in 2020. Fortunately, the fiscal year 2021 saw some recovery, with net income of $ 54.4 million. Other profitability metrics have followed a similar trajectory. After seeing operating cash flow increase from $ 195.3 million in 2017 to $ 300.5 million in 2019, it dropped to $ 223.7 million in 2020. In 2021, it increased to $ 235 million. , $ 7 million. On a tight basis, we can see a similar trend. Ultimately, this metric went from $ 388 million in 2019 to $ 150.3 million in 2020 before recovering some to $ 210 million last year. As with operating cash flow, EBITDA also saw this type of trend. The company’s high point was the $ 472.1 million generated in 2019. Finally, it fell to $ 277.7 million in 2020 before reaching $ 282.7 million in 2021.
While the market is concerned about inflationary pressures, Kennametal has done a good job of increasing costs to its customers. We can see this if we look at the financial performance achieved so far in 2022. According to management, net income for the first three quarters of the year was $ 102.9 million. That exceeds the $ 19.3 million earned at the same time last year. Operating cash flow worsened from $ 139.2 million to $ 93 million. However, if we adjust to changes in working capital, it would have recovered from $ 137.5 million to $ 221 million. Meanwhile, the company’s EBITDA also improved, from $ 176 million to $ 263 million.
Unfortunately, management has not provided any detailed guidance for fiscal year 2022. But if we annualize the results experienced so far this year, we should anticipate an adjusted operating cash flow of $ 337.5 million. and EBITDA of $ 422.4 million. This would imply a price to the company’s adjusted operating cash flow multiple of 5.8 and a multiple of EV to EBITDA of 6. Even if the company saw the results return to what they were in 2021 , these multiples would still seem low at 9.3. and 8.9, respectively. To put the company’s prices in perspective, I compared it to five similar companies. In terms of the price of operating cash flow, four of these companies had positive results, with their multiples between 13 and 20.1. Meanwhile, the multiple EVs in EBITDA of the five companies ranged from a low of 12 to a high of 31. In both cases, although we used our 2021 results, Kennametal was the cheapest in the group.
|Company||Price / Operating cash flow||EV / EBITDA|
|Mueller Water Products (MWA)||19.9||12.0|
|Hillman Solutions (HLMN)||N / A||31.0|
|Helio Technologies (HLIO)||19.3||12.3|
|ESCO Technologies (ESE)||20.1||14.8|
While Kennametal’s recent past has been a bit tough, the overall image of the company looks pretty impressive. It seems that the business is now recovering very well and the shares are trading at a low price in absolute terms and in relation to similar companies. Obviously, if we see some kind of economic slowdown, Kennametal will also be affected. And this time, as we saw in 2020, it could be quite substantial. In the short term, this could cause some pain for investors. But for those who focus only on the long term, maybe now is not a bad time to consider a stake in the company.