Here's Why Investors Should Avoid Kennametal for Now

Kennametal Inc. KMT has failed to impress investors with its recent operational performance due to weakness across its segments and rising operating expenses. Also, given Kennametal's extensive international presence, foreign currency headwind adds to the uncertainty.

Based in Latrobe, PA, Kennametal is a manufacturer, marketer and distributor of high-speed metal cutting tools, tooling systems and wear-resistant parts. The company's products are used by manufacturers and suppliers in oil and gas exploration, road construction and other industries. Shares of Kennametal have lost 11% in the year-to-date period. KMT currently carries a Zacks Rank #4 (Sell).

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Let's discuss the factors that may continue taking a toll on the firm.

Factors Affecting Kennametal

Business Weakness: Lower volume in general engineering, energy and earthwork end markets, owing to the declines in industrial activity and decreased underground mining in Asia Pacific, is affecting the Infrastructure segment. Also, reduced oil and gas activities in the United States owing to decreased rig counts remain a concern for the segment. Decrease in demand across general engineering and energy end markets, owing to lower industrial activity, softness in oil and gas markets and delays in wind energy projects, is affecting the Metal Cutting segment's revenues.

Escalating Costs: Rising operating expenses pose a concern for KMT. In the first nine months of fiscal 2024 (ended March 2024), the company's operating expenses increased year over year due to higher compensation expenses. The impact of these expenditures is evident in the rise of operating expenses as a percentage of total revenues, which climbed 40 basis points to reach 21.8%. In the same period, the company's operating margin decreased 170 basis points due to headwinds from higher wages and general inflation. Continued pressures from the high operating expenses are expected to dent Kennametal's bottom line in the near term.

Forex Woes: Kennametal's international presence exposes it to the risk of adverse currency fluctuations. This is because a strengthening U.S. dollar may require the company to either raise prices or contract profit margins in locations outside the United States. Thus, adverse currency movements are a worry for the company. In the third quarter of fiscal 2024, forex woes negatively affected the company's sales by 1%.

Southward Estimate Revision: The Zacks Consensus Estimate for KMT's fiscal 2024 (ended June 2024) earnings has been revised 2.7% downward in the past 60 days.

Stocks to Consider

Some better-ranked companies from the Industrial Products sector are discussed below:

Applied Industrial Technologies, Inc. AIT presently sports a Zacks Rank #1 (Strong Buy). It has a trailing four-quarter average earnings surprise of 8.2%.

The Zacks Consensus Estimate for AIT's fiscal 2024 earnings has improved 0.9% in the past 60 days. The stock has risen 9.3% in the year-to-date period.

Brady Corporation BRC presently carries a Zacks Rank #2 (Buy) and has a trailing four-quarter earnings surprise of 6.7%, on average.

The consensus estimate for BRC's fiscal 2024 earnings has increased 3.3% in the past 60 days. Shares of Brady have gained 12.5% in the year-to-date period.

Crane Company CR presently holds a Zacks Rank of 2. CR delivered a trailing four-quarter earnings surprise of 15.2%, on average.

The Zacks Consensus Estimate for CR's 2024 earnings has increased 0.8% in the past 60 days. Its shares have gained 20.5% in the year-to-date period.

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