Earnings

Comparing Kennametal Inc. (KMT) and Stanley Black & Decker, Inc. (SWK)

Kennametal Inc. (NYSE:KMT) shares are down more than -11.18% this year and recently increased 1.11% or $0.47 to settle at $43.00. Stanley Black & Decker, Inc. (NYSE:SWK), on the other hand, is down -7.44% year to date as of 02/13/2018. It currently trades at $157.07 and has returned -2.82% during the past week.

Kennametal Inc. (NYSE:KMT) and Stanley Black & Decker, Inc. (NYSE:SWK) are the two most active stocks in the Machine Tools & Accessories industry based on today’s trading volumes. To determine if one is a better investment than the other, we will compare the two companies’ growth, profitability, risk, return, and valuation characteristics, as well as their analyst ratings and sentiment signals.

Growth

The ability to consistently grow earnings at a high compound rate is a defining characteristic of the best companies for long-term investment. Analysts expect KMT to grow earnings at a 34.44% annual rate over the next 5 years. Comparatively, SWK is expected to grow at a 10.45% annual rate. All else equal, KMT’s higher growth rate would imply a greater potential for capital appreciation.



Profitability and Returns

Just, if not more, important than the growth rate is the quality of that growth. Growth can actual be harmful to investors if it comes at the cost of weak profitability and low returns. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return., compared to an EBITDA margin of 17.19% for Stanley Black & Decker, Inc. (SWK). KMT’s ROI is 4.80% while SWK has a ROI of 11.10%. The interpretation is that SWK’s business generates a higher return on investment than KMT’s.

Cash Flow 




Earnings don’t always accurately reflect the amount of cash that a company brings in. KMT’s free cash flow (“FCF”) per share for the trailing twelve months was +0.33. Comparatively, SWK’s free cash flow per share was +4.51. On a percent-of-sales basis, KMT’s free cash flow was 1.31% while SWK converted 5.43% of its revenues into cash flow. This means that, for a given level of sales, SWK is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Liquidity and leverage ratios measure a company’s ability to meet short-term obligations and longer-term debts. KMT has a current ratio of 2.80 compared to 1.30 for SWK. This means that KMT can more easily cover its most immediate liabilities over the next twelve months. KMT’s debt-to-equity ratio is 0.62 versus a D/E of 0.54 for SWK. KMT is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

KMT trades at a forward P/E of 14.16, a P/B of 3.11, and a P/S of 1.58, compared to a forward P/E of 16.62, a P/B of 3.24, and a P/S of 1.87 for SWK. KMT is the cheaper of the two stocks on an earnings, book value and sales basis. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.

Analyst Price Targets and Opinions

Investors often compare a stock’s current price to an analyst price target to get a sense of the potential upside within the next year. KMT is currently priced at a -19.63% to its one-year price target of 53.50. Comparatively, SWK is -18.17% relative to its price target of 191.94. This suggests that KMT is the better investment over the next year.

The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.30 for KMT and 2.10 for SWK, which implies that analysts are more bullish on the outlook for KMT.

Risk and Volatility

No discussion on value is complete without taking into account risk. Analysts use a stock’s beta, which measures the volatility of a stock compared to the overall market, to measure systematic risk. A stock with a beta above 1 is more volatile than the market. Conversely, a beta below 1 implies a below average level of risk. KMT has a beta of 1.84 and SWK’s beta is 0.98. SWK’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment

Short interest is another tool that analysts use to gauge investor sentiment. It represents the percentage of a stock’s tradable shares that are being shorted. KMT has a short ratio of 2.64 compared to a short interest of 2.01 for SWK. This implies that the market is currently less bearish on the outlook for SWK.

Summary

Stanley Black & Decker, Inc. (NYSE:SWK) beats Kennametal Inc. (NYSE:KMT) on a total of 8 of the 14 factors compared between the two stocks. SWK is growing fastly, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate and has lower financial risk. In terms of valuation, KMT is the cheaper of the two stocks on an earnings, book value and sales basis, Finally, SWK has better sentiment signals based on short interest.

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