Kennametal's operations are highly cash generative and enjoy strong competitive positions. Meanwhile management seems to be focused on the right things, both commercially and as capital allocators: improving the customer value proposition through innovation, balancing organic growth and acquisitions and sharing excess capital with shareholders via buybacks and a growing dividend. Kennametal derives more than half its sales from outside the U.S., however, where economic headwinds of late have stiffened considerably, while some of the company's end markets, such as oil and gas, have softened for industry specific reasons. For investor/speculators hewing to a shortterm timeframe, these may be legitimate concerns. As investors with a long-term time horizon, we are willing to tolerate temporary weakness in a business when the company has compelling longer-term business prospects, an impregnable financial position, a sensibly incentivized and
competent management team and where the shares trade at a significant discount to intrinsic value. In Kennametal's case, we view the opportunity to acquire shares in the mid $30's per share, equating to about nine times earnings, an attractive one given our estimate of intrinsic value in excess of $50. Operating in what we view as "cyclical growth" markets where the "growth path" is unlikely to be a straight one, Kennametal, nonetheless, ought to have ample opportunities to grow at above average rates in the coming years.
From Third Avenue's third-quarter letter, by Curtis R. Jensen, chief investment officer and portfolio manager of Third Avenue Small-Cap Value Fund.