What a time it’s been for Kennametal. In the past six months alone, the company’s stock price has increased by a massive 76.9%, reaching $39.18 per share. This was partly thanks to its solid quarterly results, and the run-up might have investors contemplating their next move.

Is now the time to buy Kennametal, or should you be careful about including it in your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.

Why Do We Think Kennametal Will Underperform?

We’re glad investors have benefited from the price increase, but we're sitting this one out for now. Here are three reasons there are better opportunities than KMT and a stock we'd rather own.

1. Long-Term Revenue Growth Disappoints

Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can have short-term success, but a top-tier one grows for years. Unfortunately, Kennametal’s 3.6% annualized revenue growth over the last five years was sluggish. This was below our standard for the industrials sector.

2. Core Business Falling Behind as Demand Plateaus

In addition to reported revenue, organic revenue is a useful data point for analyzing Professional Tools and Equipment companies. This metric gives visibility into Kennametal’s core business because it excludes one-time events such as mergers, acquisitions, and divestitures along with foreign currency fluctuations - non-fundamental factors that can manipulate the income statement.

Over the last two years, Kennametal failed to grow its organic revenue. This performance was underwhelming and implies it may need to improve its products, pricing, or go-to-market strategy. It also suggests Kennametal might have to lean into acquisitions to accelerate growth, which isn’t ideal because M&A can be expensive and risky (integrations often disrupt focus).

3. Recent EPS Growth Below Our Standards

Although long-term earnings trends give us the big picture, we like to analyze EPS over a shorter period to see if we are missing a change in the business.

Kennametal’s EPS grew at a weak 1.9% compounded annual growth rate over the last two years. On the bright side, this performance was higher than its 1.1% annualized revenue declines and tells us management adapted its cost structure in response to a challenging demand environment.

Final Judgment

Kennametal doesn’t pass our quality test. Following the recent surge, the stock trades at 13.9× forward P/E (or $39.18 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. There are better investments elsewhere. We’d suggest looking at the most entrenched endpoint security platform on the market.

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