When evaluating a century-old industrial pioneer like Kennametal (NYSE:KMT), the headline numbers, such as a recent surge to record profitability, only tell half the story. To truly understand if a cyclical manufacturer deserves its current valuation, one must look beneath the quarterly fluctuations to examine the foundational drivers: pricing power, structural margin resilience, portfolio compounding, and proprietary manufacturing execution. Behind the recent financial metrics lies a business deeply anchored in specialized materials science, where precision engineering and operational discipline dictate long-term shareholder value.
On September 15, Kennametal unveiled KAF82, the first additive manufacturing tungsten carbide grade of its kind to reach commercial scale for metal cutting tools, injecting an exciting catalyst into a company that had already posted record profitability for fiscal 2026 just weeks prior. With two automotive OEMs already running production tooling built with it and a powder supply chain kept strictly under lock and key, this development raises a fair question: is the business finally firing on all cylinders, or is the market getting ahead of itself?
Turning Powder Into A Moat
At its core, KAF82 is a fully dense tungsten carbide grade made through additive manufacturing, and Kennametal controls the entire chain behind it, from proprietary powder production through sintering and finishing. Because the powder is not sold externally, rivals cannot simply buy the same material and match the offering. That exclusivity matters because custom hole finishing tools that once took months to develop can now ship in weeks, letting customers react faster to design changes. Two major automotive OEMs have already put KAF82 tooling into live production lines, which is a real adoption signal rather than a lab demo.
The grade also uses less tungsten per part, a detail worth noting given how expensive that raw material has become. Kennametal is pitching KAF82 across aerospace and defense, energy, general engineering, and transportation, a wide net for a single product line. It also builds on the company’s existing binder jet additive work, so this reads as an extension of a strength rather than a first attempt. That underlying strength showed up in the numbers too. Fourth quarter sales rose 43% to $737 million, and adjusted earnings per share hit a record $2.96, capping a fiscal year with adjusted EPS of $4.57.
The Cash Flow Catch
The same fiscal year that produced record earnings also produced a swing to negative operating cash flow, from $208 million positive to $4 million negative, driven largely by working capital tied up in inventory built at unusually high tungsten prices and advance payments made to lock in supply. Free operating cash flow went from $121 million positive to $79 million negative on the same pressures. Some of the quarter’s dramatic margin improvement, from 6.1% to 41.1%, was explicitly credited to favorable timing between raw material pricing and costs, a benefit tied to a specific stretch of the tungsten market rather than a structural fix.
Higher compensation costs, tariffs, and general inflation are still working against margins in the background. Kennametal’s own guidance for the first quarter of fiscal 2027 calls for adjusted EPS of $2.50 to $2.80, a step down from the $2.96 just posted, and the full year range of $4.15 to $5.15 is wide enough to suggest real uncertainty about how the tungsten environment settles. KAF82 is also brand new, and two OEM wins, while genuine, are not yet evidence that the technology scales across Kennametal’s much larger customer base.
Where The Smart Money Sits
Hedge fund ownership of Kennametal rose from 35 funds to 40 last quarter, which points to accumulating rather than fading conviction. Short interest still sits at 13.05% of the float, a level that reflects a real bear camp rather than background noise. The stock’s forward price-to-earnings ratio of 21.37, as of September 22, is not a bargain multiple for a cyclical industrial name working through a volatile raw material cycle. That combination shows a market that has not settled on which story wins.
Weighing The Breakthrough Against The Balance Sheet
Kennametal enters fiscal 2027 with a genuine technical edge in KAF82 and a raw material problem that just drained its cash flow in the same year it set profit records. The bulls have real proof points: OEM adoption, a defensible manufacturing process, and a lower tungsten requirement that directly addresses the company’s biggest cost headache. The bears have equally real numbers: negative free cash flow, a pricing tailwind that may not repeat, and guidance that points to earnings cooling from the fourth-quarter peak. Whether KAF82 becomes a broad revenue driver or stays a niche win will likely decide which side of that ledger matters more over the next few years. For now, the two halves of Kennametal’s story, one about innovation and one about cash, are pulling in different directions.
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