Kennametal’s (KMT) Earnings Surge Comes With A Costly Catch

On August 5, Kennametal (NYSE:KMT) reported fiscal 2026 fourth-quarter results that turned a rough prior year into a record one. Sales climbed 43% to $737 million, and adjusted earnings per share hit a record $2.96 for the quarter, capping a fiscal year in which adjusted EPS reached $4.57. For a company that makes cutting tools and wear-resistant parts for industries ranging from aerospace to mining, that is a dramatic swing. But the same release that produced those headline numbers also disclosed a cash flow problem that the profit figures do not show.

Pricing Power Finally Pays Off

The scale of the turnaround shows up most clearly in margins. Fourth quarter operating margin jumped to 41.1% from just 6.1% a year earlier, and adjusted operating margin followed the same path, rising to 41.5% from 7.4%. For the full fiscal year, sales reached $2.36 billion, up 20% from $1.97 billion, with organic growth accounting for 19 points of that gain. Both of Kennametal’s segments contributed. Metal Cutting sales rose 24% to $398 million in the quarter, while its operating margin more than tripled to 26.7%. Infrastructure sales jumped 73% to $339 million, and its operating margin ballooned to 58.3% from 5.5% a year ago.

Management pointed to wins in the Aerospace & Defense, Energy and Earthworks end markets as evidence the company is taking share regardless of market conditions, and it is carrying that confidence into its outlook. For fiscal 2027, Kennametal is guiding to annual sales of $3.33 billion to $3.45 billion, with first quarter sales expected between $745 million and $775 million.

When Profit Outruns Cash

The numbers behind the numbers tell a different story. Fiscal 2026 net cash flow from operating activities was negative $4 million, a sharp reversal from positive $208 million the prior year, and free operating cash flow swung to negative $79 million from positive $121 million. The company attributed this to working capital needs, including inventory built up in response to unprecedented tungsten price increases and advance payments made to suppliers just to lock in raw material supply.

That detail matters because much of the reported margin expansion came from the favorable timing of raw material-related pricing relative to costs, a timing benefit rather than a structural one that could narrow once purchasing catches up with pricing. Infrastructure’s eye-popping 58.3% operating margin arrived even as the segment’s own sales and production volumes declined in the quarter, meaning the profit jump did not come from higher underlying demand there. And the fiscal 2027 adjusted EPS guidance of $4.15 to $5.15 spans a full dollar, a wide band for a company this size.

Where The Smart Money Stands

Hedge fund ownership of Kennametal rose from 35 funds to 40 in the most recent quarter, which points to institutions adding to positions rather than trimming them. That accumulation is happening alongside short interest of 13.05% of float, a level that reflects real, organized skepticism rather than routine hedging. Meanwhile, the stock trades at a forward P/E of 22.12 as of September 15, a multiple that already assumes some of this earnings strength holds up. Rising fund ownership next to double-digit short interest is an unusual combination, and it suggests the market has not settled on which story about Kennametal is the right one.

Two Stories, One Stock

Kennametal’s fourth quarter delivered the kind of margin and earnings numbers that are hard to ignore, but the cash flow statement tells a more cautious version of the same period. For the bullish case to hold, the pricing gains driving those margins need to prove durable rather than a temporary gap between when tungsten costs rose and when the company priced for them. For the more skeptical read to matter, the working capital drag and the reliance on pricing timing rather than volume growth in Infrastructure would need to persist into fiscal 2027.

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