Kennametal Inc. KMT is well-poised for growth in the coming quarters, courtesy of the strong performance of its Infrastructure segment. The company's efforts to reward its shareholders handsomely add to its appeal.

Based in Latrobe, PA, Kennametal is a manufacturer, marketer and distributor of high-speed metal cutting tools, tooling systems and wear-resistant parts. Its products are marketed through a number of channels to the end users, comprising manufacturers of machine tools, transportation vehicles and various components, airframes, aerospace components, machinery (light and heavy), components (energy-related) and others.

In the past six months, this Zacks Rank #3 (Hold) company’s shares have gained 7.7% against the industry’s 0.1% decline.

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Business Strength: The company is benefiting from the strong performance of the Infrastructure segment, driven by strength in the aerospace & defense and energy end markets arising from favorable order timing. Also, despite the ongoing softness across the majority of end markets, KMT is witnessing several positive trends in its key end markets that hold promise for its long-term growth. This includes an increase in U.S. and international defense spending volumes and digitalization. 

Well-Diversified Portfolio: Kennametal is poised to benefit from its well-diversified portfolio and investments in product development. Some notable products introduced by the company are TopSwiss Inserts, HARVI TE Duo-Lock, KSEM ST Line, Through Coolant ER Collets, FV Geometry Inserts and Chip Fan, etc. Also, it remains focused on investing in manufacturing facilities to boost growth. For instance, in December 2022, Kennametal introduced a metal cutting inserts manufacturing facility in Bengaluru, India, which bolstered its capability to cater to the increasing demand for existing and new product lines.

Shareholder Friendly policies: The company remains committed to rewarding its shareholders through dividend payments and share buybacks. In the first three months of fiscal 2025 (ended September 2024), it distributed dividends totaling $15.6 million to its shareholders and bought back shares for $15 million. In fiscal 2024 (ended June 2024), Kennametal distributed dividends worth $63.4 million and repurchased shares worth $65.4 million. Recently, the company completed the initial share repurchase program, which was announced in July 2021.

Downsides of KMT

Segmental Weakness: A decrease in demand across the transportation end market, owing to lower volumes and project activity, is affecting the Metal Cutting segment’s revenues. Also, lower economic activity and project timing in the general engineering end market are ailing the segment. Owing to the prevailing softness across its businesses, the company expects revenues to be in the range of $2.0-$2.1 billion for fiscal 2025 (ending June 2025), implying a year-over-year decrease of 1.4% at the midpoint.

High Costs: Kennametal has been witnessing the impacts of high operating expenses over time. Although the company’s operating expenses were relatively flat year over year in the first quarter of fiscal 2025, it incurred higher compensation expenses. The impact of these expenditures is evident in the rise of operating expenses as a percentage of total revenues, which increased 50 basis points to reach 23.2%.

In the first quarter of fiscal 2025, the company’s operating margin decreased 130 basis points due to headwinds from higher wages, general inflation and certain manufacturing costs. For fiscal 2025, continued pressures from high operating expenses and inflationary environment are expected to dent Kennametal’s bottom line.

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