Operational execution and solid revenue growth should drive earnings improvement at Kennametal.
Kennametal is a solid income generator for investors
Lee Samaha (Kennametal): The tooling and metal-cutting products company isn’t the most exciting investment, but it currently yields 3% and has solid end markets and earnings growth prospects.
Management recently held an investor day presentation and laid out plans to generate organic sales growth of 4%-6% to 2027, accompanied by adjusted earnings before interest, taxation, depreciation, and amortization (EBITDA) margin expansion from 15.5% in 2023 to 20%-23% in 2027. That combination is expected to produce a compound annual growth rate of 20%-25% in adjusted earnings per share.
Given that management’s stated capital allocation aims include returning “cash to shareholders via dividends and stock repurchases,” it’s hard to imagine its dividend payout won’t increase significantly if the 2027 targets are hit.
Kennametal doesn’t operate in high-growth markets (the 4%-6% growth plan assumes just 1%-2% annual market growth with 1%-2% coming from market share gains and 2% from pricing). This is more of a story on the company refocusing on some of its higher growth end markets, such as metal cutting tools in aerospace & defense and medical, as well as a solid growth contribution from its exposure to infrastructure spending.
At the same time, management plans to drive margin expansion by cutting costs by $100 million via closing plants to reduce structural costs and investing in automation and smart manufacturing facilities. All told, it all comes together to make Kennametal a boring way to generate growth and dividends over the next few years, and that’s fine for many investors
