The stock of Kennametal (NYSE:KMT, 30-year Financials) is believed to be significantly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $36.64 per share and the market cap of $3.1 billion, Kennametal stock gives every indication of being significantly overvalued. GF Value for Kennametal is shown in the chart below.
Because Kennametal is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth.
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Investing in companies with poor financial strength has a higher risk of permanent loss of capital. Thus, it is important to carefully review the financial strength of a company before deciding whether to buy its stock. Looking at the cash-to-debt ratio and interest coverage is a great starting point for understanding the financial strength of a company. Kennametal has a cash-to-debt ratio of 0.17, which is worse than 87% of the companies in Industrial Products industry. GuruFocus ranks the overall financial strength of Kennametal at 5 out of 10, which indicates that the financial strength of Kennametal is fair. This is the debt and cash of Kennametal over the past years:
Investing in profitable companies carries less risk, especially in companies that have demonstrated consistent profitability over the long term. Typically, a company with high profit margins offers better performance potential than a company with low profit margins. Kennametal has been profitable 7 years over the past 10 years. During the past 12 months, the company had revenues of $1.7 billion and earnings of $0.12 a share. Its operating margin of 5.72% in the middle range of the companies in Industrial Products industry. Overall, GuruFocus ranks Kennametal’s profitability as fair. This is the revenue and net income of Kennametal over the past years:
Growth is probably one of the most important factors in the valuation of a company. GuruFocus’ research has found that growth is closely correlated with the long-term performance of a company’s stock. If a company’s business is growing, the company usually creates value for its shareholders, especially if the growth is profitable. Likewise, if a company's revenue and earnings are declining, the value of the company will decrease. Kennametal’s 3-year average revenue growth rate is worse than 70% of the companies in Industrial Products industry. Kennametal’s 3-year average EBITDA growth rate is -11.1%, which ranks worse than 78% of the companies in Industrial Products industry.
Another way to evaluate a company’s profitability is to compare its return on invested capital (ROIC) to its weighted cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the ROIC is higher than the WACC, it indicates that the company is creating value for shareholders. Over the past 12 months, Kennametal’s ROIC was 2.74, while its WACC came in at 10.14. The historical ROIC vs WACC comparison of Kennametal is shown below:
To conclude, the stock of Kennametal (NYSE:KMT, 30-year Financials) is estimated to be significantly overvalued. The company's financial condition is fair and its profitability is fair. Its growth ranks worse than 78% of the companies in Industrial Products industry. To learn more about Kennametal stock, you can check out its 30-year Financials here.
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