What Little-Known Stock is Atlantic Investment Management Buying?

Billion-dollar fund Atlantic Investment Management filed with the SEC to disclose that it had raised its equity stake in Kennametal (KMT) to 5.2 million shares, up from 4.3 million that it had owned in the middle of June and 3.4 million shares at the end of March (see more stocks Atlantic owned at the end of March). Atlantic started investing in Kennametal in the fourth quarter of 2011, and the most recent increase in shares places Atlantic and its manager Alexander Roepers with nearly 6.5% of the shares outstanding. Kennametal produces machine tools used by metalworking customers in its Industrial (including aerospace and defense) and Infrastructure segments (including energy and mining).

Alexander Roepers

Roepers likes to focus on value stocks, with much of his holdings in industrials. As KMT has fallen about 25% in the last three months, he appears to be doubling down on a trade he is confident in and believes that the market will eventually recognize. The company’s trailing price-to-earnings ratio is just under 9; on a forward basis, this ratio slips to under 8. With KMT beating earnings estimates for each of the past four quarters, growing its revenue 13% in the first quarter of 2012 compared to the first quarter of 2011, and also increasing its margins to finish with net earnings that were 17% higher, on the surface Kennametal could prove to be a hidden gem.

Looking more closely at Kennametal’s business, the three quarters ending March 31, 2012 (Kennametal has a June fiscal year end) resulted in 17% revenue growth and a 55% net income growth. If the company is able to continue this growth performance in the future the stock price should benefit both from the increase in earnings and the recognition that it deserves a higher multiple on its earnings. The company generated much of its growth in these three quarters from its Industrial segment, though the smaller Infrastructure segment grew its operating income by 19%.

Another manager with an investment in KMT is Chuck Royce with Royce and Associates. Royce is a graduate of Columbia Business School’s renowned value investing program and probably has chosen to own 6.5 million shares of Kennametal for much of the same reason that Roepers has increased his holdings: it can be seen as a neglected value company (find other stocks owned by Royce and Associates). Royce’s stake has fluctuated for the past few quarters but has owned about 6 million shares at least since the end of 2010.

Two of Kennametal’s larger peers are Caterpillar (CAT) and Illinois Tool Works (ITW) with market caps of $53 billion and $24 billion respectively compared to KMT’s $2.6 billion. These companies also trade at fairly low P/E multiples. The multiple is 10 for Caterpillar- close to KMT’s despite it being a larger cap company which earned higher growth in the first quarter- and just under 13 for ITW. ITW and CAT do trade at EBITDA multiples between 8 and 9, compared to KMT trading at just above 6x. So far this year Caterpillar and Kennametal have tracked each other very closely in the stock market; ITW moved much in line with the other companies until late April, when it began to fall in price more slowly and now actually sits up about 8% for the year. We think KMT is an attractive long-term investment but this may not be the best time to buy the stock. The recent declines were in anticipation of a global slowdown and we haven’t seen the end of that yet.

blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

10 High Margin Food Products to Build a Business Around

The 10 Most Expensive Clothing Stores in the United States to Get Decked Out At

The 5 Biggest Kickstarter Scams That Swindled Backers’ Donations

The 10 Most Expensive Boarding Schools In the World

50 Crazy Facts About Japan You Won’t Believe

Top 10 Least Expensive Hybrid Cars to Save the Planet With

The 10 Biggest ‘Gate’ Controversies in History

The 10 States with the Highest Nursing Shortages Leaving Their Hospitals Depleted

The 10 Best Value Investment Blogs that Every Investor Must Read

The 6 Cheapest Boarding Schools in Europe 2015

The 5 Most Expensive Cars To Insure in the World

The 10 Most Common Genetically Modified Foods

10 Self-Made Billionaires Who Came From Nothing

The 10 Most Expensive Cities to Live in North America

The 13 Most Expensive Headphones in the World to Represent

The Top 20 Wealthiest Soccer Teams in 2014

4 BuzzWorthy Cannabis Stocks And Some Smoking Derivative Plays

The 10 Healthiest Fast Food Chains in America to Dine At

The 5 Most Expensive Cat Food Brands You Can Spoil Your Kitty With

The 6 Best eCommerce Platforms for Small Businesses

The 10 Worst Mistakes an Entrepreneur Can Make

The 5 Most OP Characters in League of Legends to Carry Games and Crush Foes With

The 5 Best Foods to Eat Before Running that Will Help You Pound the Pavement

10 Glaring Plot Holes in The Walking Dead that a Zombie-Filled Bus Could Drive Through

The 5 Biggest Celebrity Stoners Who Love Their Reefer

The 10 Most Overrated Movies Of All Time by Out-of-Touch Critics

Top 6 Least Expensive Cruise Destinations For 2015 that Will Take You to Paradise

10 States with Lowest Substance Abuse Rates in America

The 14 Most Watched TV Finales Ever

The 10 Best Selling Role Playing Games of All Time for PC

10 Most Influential Papers In Economics

Top 8 Biggest Charities in the US

10 Worst Celebrity Career Moves Ever

Top 10 Best Paid Tennis Stars in the World

Top 6 Cities For The Ultra Rich to Live in Comfort

10 Cities with High Demand for Nurses

6 of the Worst Greeting Card Messages Ever Crafted

How to Make Money in ArcheAge and Build Your Empire

10 Foods To Eat To Lower Cholesterol Levels

The 10 Most Hated Television Characters of All Time

The 30 Worst Halloween Costume Ideas Ever Brought to Horrible Life

10 Vocational Skills in Demand Today with Jobs Waiting to be Filled

10 Best Places to Visit in Central and South America

The 10 Greatest Empires in History Which Nearly Conquered the World

The 6 Cheapest Boarding Schools In America 2015

5 Clear Reasons LoL is Better than DotA, Continues to Rule MOBAs

The Only 9 Teams with a Chance to Win the Super Bowl

The 15 Most Common Phobias in America that Induce Fits of Panic

Top 6 Least Expensive Tourist Destinations in 2014

Jim Goetz, Peter Fenton, Jim Breyer: Top 6 Venture Investors for 2014

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!