Wednesday, KeyBanc Capital downgraded Kennametal Inc. (KMT) shares to Hold from Buy. The brokerage maintained its fiscal 2010 EPS estimate of $0.73 and its 2011 estimate of $1.62, while introducing its fiscal 2012 estimate of $1.98.
Analyst Steve Barger downgraded the stock as it has achieved his former price target of $28, having returned 59% since his February 9, 2009 upgrade vs. the S&P 500's return of 31% over the same time frame. While the analyst believes KMT is executing well through this downturn, in his view the stock could be "priced to perfection" both operationally and with respect to end markets.
From a valuation perspective, the analyst noted in the prior downturn once KMT's valuation passed its peak multiple on trough earnings, 34.0x in fiscal 2003 vs. the current 39.6x his fiscal 2010 estimate, it traded at an average multiple of 14.0x from fiscal 2005 - fiscal 2008. In the context of the analyst's fiscal 2011 estimate of $1.62, the shares are currently trading at 17.6x.
Even should the analyst be under-modeling our forward estimate by 20%, implying fiscal 2011 EPS of ~$1.95, the implied multiple would be 14.6x, which he would consider fairly valued. Therefore, the analyst believes investors may be better served by taking profits and redeploying capital into names with more upside while waiting for a more opportune entry point relative to its historical valuation range, likely in the low-to-mid $20 range.
Broadly speaking, the analyst continues to favor names with low multiples, a higher percentage of international revenue opportunities, pricing power, solid cash generation characteristics and solid balance sheets. For investors that are bullish on the global economy and are willing to own a higher risk, lower visibility name, the analyst thinks Terex Corp. (TEX) remains a compelling story.
Currently, KMT is down $0.52 or 1.82% and trading at $28.01.
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