December 19, 2011 - Kennametal Inc. (KMT-NYSE) manufactures and supplies tooling, engineered components, and advanced materials consumed in production processes worldwide. It offers various metal working products, including milling, turning tooling, holemaking and finishing, and tooling systems; and energy, mining, metallurgical, construction, and agriculture equipment, as well as various solutions for aggregates applications.

In addition, it offers various services, such as reconditioning, carbide recycling, steel tool repair, supply chain services, new project engineering, process optimization services, deburring, polishing, and surface finishing services.

The company operates in two segments, Industrial and Infrastructure. The Industrial segment serves customers in industrial end markets, such as aerospace, defense, transportation, and general engineering.

The Infrastructure segment serves customers in earthworks and energy end markets, such as oil and gas, power generation, underground mining, surface and hard rock mining, highway construction, and road maintenance. The company sells through a direct sales force; a network of independent distributors and sales agents; and the Internet. Kennametal Inc. was founded in 1938 and is headquartered in Latrobe, Pennsylvania.

Kennametal suffered two down years in sales, but only one in earnings. In 2009, revenues dropped to just below $2 billion after hitting $2.7 billion in '08. Then they slipped a little more, to $1.884 billion in 2010. Earnings went from $2.75 in '08 to 80 cents in '09, then rebounded to $1.10 in 2010 (fiscal year ends in June) 2011 finished at $2.98. Management took all the hits needed in 2009 to make sure profits improved.

This year, 14 analysts have a consensus estimate of $3.71, another nice gain, then see $4.22 in 2013. Results in the first quarter of this year are indicative of the renewed sales and profitability, showing sales of $659 million in revenues vs $529 last year in the first quarter and 88 cents in profits compared to 47 cents last year in the first. Look for 78 cents in the December quarter against 57 cents last year in the second period.

Look for the auto manufacturers to continue their upward trends as global ecnomies pull out of the recent recession. They had their lowest demand in more than a decade in 2009. Aerospace is another hot market. Major commercial manufacturers show backlogs that go for seven years while production continues to gear up. Boeing's latest huge order from Southwest Air is a good example of demand that's waiting to be filled.

Management, as mentioned above, focused during 2009, took the hits needed to adjust the company to a new reality, and saw the rewards in 2010 and 2011. Operating margins have more than doubled since that trough year. Part of the recovery is from better sales and raw materials costs. But most of it is from the restructuring program that saw a downsizing of personnel and space but left production capacity unaffected. All told, savings came to $170 million a year, which will continue. Expect more cost reductions and more efficiencies as management stays focused on improving margins.

Essential Numbers:
- Market Cap: $2.84 billion
- Forward P/E: 8.5
- Price to book: 1.8
- Operating margin: 15.12%
- Profit margin: 10.53%
- Return on assets: 9.59%
- Total cash: $102. 55 million
- Total cash per share: $1.29
- Total debt: $333.3 million
- Total debt to equity: 21%
- Current ratio: 1.57
- Book value per share: $19.75
- Beta: 1.46
- 52 week change: -5.92%
- Shares Outstanding: 79.46 million
- Float: 78.97 million
- Held by insiders: .76%
- Held by institutions: 91.6%
- Annual dividend: 56 cents
- Yield: 1.6%

Most investors will find some comfort in this company. It survived the worst of the recession and came out stronger. With the restructuring, annual savings are impressive, adding directly to the bottom line. If the global economy can gain more traction, expect all earnings estimates to rise as this company will benefit from the infrastructure programs and manufacturing growth that implies.

- Company Web site: www.kennametal.com

     Ted Allrich