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.

Biotech Insider Alert - $6 Stock To Hit $40

$200 Million Dollar Healthcare Hedge Fund's #1 Best Idea Right Now

The best healthcare hedge fund out there right now is one of the largest shareholders in this biotech stock. The fund returned more than 20% in each of the last 2 years with a virtually fully hedged portfolio, and it's sending out a BUY signal on this biotech stock. Get your FREE REPORT today (retail value of $300)

This is a FREE report from Insider Monkey. Credit Card is NOT required.
Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

The World’s Most Famous Circuses

Best Hair Stylists

Most Popular NASCAR Drivers

The Best Romance Movies of all Time

The Most Wanted Drug Lords

The Oldest Money Managers

The Greatest Directors in the World

Largest Animals in the World

World’s Most Expensive Desserts

Best Selling Comic Books of All Time

A-list Actors who Sabotaged Their Career

Rappers With a College Degree

The Best Jazz Albums of all Time

The Most Influential Jazz Musicians

The World’s Most Famous Photographers

The Best Oscar-Winning Songs

Most Influential Choreographers Ever

Most Expensive Department Stores in the World

The Most Expensive Stolen Paintings in the World

The World’s Most Expensive Teas

Top Oscar Record Holders

The Most Expensive Flowers in the World

Countries With a Booming Film Industry

Most Expensive Cupcakes in the World

Uncommon European Escapes

The Most Stolen Artists in History

Best Travel Destinations in Australia

World’s Most Expensive Musical Instruments

World’s Most Famous Animals

Most Expensive Cakes in the World

Most Expensive Kosher Champagne in the World

Most Expensive Kosher Wine in the World

The Most Surprisingly Dark Fairy Tales

Most Popular Travel Destinations in Asia

The 10 Most Expensive Dresses Ever Worn to the Oscars

World’s Most Visited Art Museums

Best Countries for Photographers to Work in

Best Paid Jobs in the Film Industry

The Most Renowned Recovered Paintings Ever

Child Stars That Turned out Just Fine

Books That Were Banned in the Past Century

World’s Richest Dancers

Best Remedies against Bad Breath

Foods That Improve Your Skin Texture

Best-Selling Children’s Books of all Time

Foods That Boost Your Libido

Best-Selling Books of all Time

The Most Expensive Academy Awards Jewelry in History

Most Expensive Japanese Restaurant In New York City

The Best B-Boy Movies

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 129% in 2.5 years!! Wondering How?

Download a complete edition of our newsletter for free!