KENNAMETAL INC (KMT) stock intrinsic value fair value estimate & owner earnings analysis

Kennametal, founded in 1938, makes tungsten carbide cutting tools, inserts and tooling systems sold under the Kennametal and WIDIA brands (Metal Cutting segment), plus engineered wear parts, earth-cutting tools and tungsten carbide powders (Infrastructure segment). Its customers are in general engineering, transportation, aerospace and defense, energy and mining. Its fiscal year ends June 30. How we measure earnings: we start from operating cash flow and strip out swings in working capital. We then charge stock compensation, the capital spending needed to maintain the plants, and the share of profit that belongs to minority partners. Because we value the business before its lenders and subtract debt separately, we add back cash interest of about $25-28 million a year. On that basis the business produced $1.90-2.37 per share in normal years: $2.25 in fiscal 2018, $2.03 in 2019, $2.37 in 2022, $2.24 in 2023, $1.99 in 2024 and $1.90 in 2025. Fiscal 2017 and 2021 were weak because of cash restructuring costs and pension contributions. Fiscal 2020 was negative: COVID cut sales by 21% just as spending on modernizing the plants peaked at $244 million. We anchor on the median of fiscal 2017-2025, $1.99 per share, because that window covers a full cycle, including the 2020 trough. Fiscal 2026 is excluded. Sales rose 20% to $2.36 billion and operating income jumped to $472.5 million from $143.1 million. However, the company attributes about $316 million of that to tungsten-related price increases running ahead of its costs. Tight global supply and export controls had driven tungsten prices sharply higher. That is a one-time timing gain, not repeatable earning power. Over the same year, inventories doubled from $538 million to $1.11 billion, mostly because tungsten cost more. The company also prepaid suppliers to secure raw material, and operating cash flow was negative $4 million. Our measure gives $6.66 per share before interest for the year, but most of that is the timing gain, and the cash went into inventory funded partly with debt. Growth: revenue was $2.06 billion in fiscal 2017 and $1.97 billion in fiscal 2025, so there was no nominal growth in eight years. We see no proven, repeatable growth engine, so none of the cases assumes growth. Business cash flow fell about 4% in fiscal 2025. It more than tripled in fiscal 2026, but only because of the tungsten timing gain. Our first year is set at the $1.99 anchor, far below that reported jump. Debt: at June 30, 2026 total debt was $717.5 million against $95.8 million of cash. It consisted of $300 million of 2.8% notes due 2031, $300 million of new 5.8% notes due 2036, $90.6 million of 4.625% notes due 2028 (redeemed on July 1, 2026 for $91.0 million), $20 million drawn on the revolving credit line and $12.2 million of local bank lines. We treat about $50 million of cash as needed to run the business. We also credit the low 2.8% coupon on the 2031 notes, which is worth about $38 million compared with a 6% rate. That leaves net debt of about $634 million, or $8.19 per share. The company also expects to have fully drawn a new $500 million three-year term loan by September 30, 2026. We treat that loan as neutral while its proceeds are held. However, it lifts gross debt to about $1.2 billion, and the bank agreement caps net debt at 3.75 times EBITDA. Base case, $21.76 per share: business cash flow stays at $1.99 per share with no growth. It lasts 40 years, supported by an 88-year-old franchise in carbide tooling that customers wear out and must keep replacing. The business is worth about $2.32 billion ($29.94 per share); after $634 million of net debt, the shares are worth $21.76. Bear case, $5.72 per share: tungsten prices fall back. The company itself warns that this could force inventory write-downs, and supply bought or prepaid at high prices costs about $1 per share over the next two years. An industrial downturn like 2020 hits in years two and three. Business cash flow drops to between zero and $0.50 per share, briefly below the roughly $0.71 per share interest bill once the term loan is drawn. Earnings then settle at $1.70 per share and shrink 2% a year for 30 years, in line with the 2023-2025 sales decline. Working capital absorbs part of the new term loan, adding $200 million of debt, and pressure near the leverage limit raises borrowing costs by about $45 million. Past deals also argue for no credit to future acquisitions: fiscal 2015-2016 carried $667 million of restructuring and asset impairment charges plus a $131 million loss on a divestiture, and fiscal 2020 brought a further goodwill impairment. The business is worth about $1.32 billion ($17.07 per share) against about $879 million of debt ($11.35 per share), leaving $5.72. Bull case, $29.64 per share: the business holds $2.40 per share. This rests on about $27 million of restructuring savings realized in fiscal 2026, price and tariff surcharges in Metal Cutting, and a leaner capital budget ($77-89 million in fiscal 2025-2026 versus $94-108 million in 2023-2024). That level matches the best recent year (fiscal 2022, $2.37) and roughly matches fiscal 2026 with the tungsten timing gain removed. It lasts 50 years. The business is worth about $2.93 billion ($37.83 per share); less $634 million of net debt, the shares are worth $29.64. We left out any lasting margin boost to Infrastructure from high tungsten prices, because it depends on a commodity price rather than anything the company controls. What could make this wrong: on the downside, a lasting fall in machining volumes beyond the slow erosion already seen, or a tungsten collapse during a downturn that leaves high-cost inventory and higher debt. On the upside, a lasting step-up in earnings from the restructuring that the base case does not credit. Change since our previous estimate: in August we put the base value near $10 per share, using higher, risk-adjusted discount rates applied to cash flow after interest and working-capital swings. We now discount every case at a flat 6% and value the business before its lenders, then subtract debt. We also remove working-capital swings and the one-time tungsten gain. These method changes raise the values. The bear case now also carries specific risks from the inventory build and the new term loan.