Kennametal (KMT) Q3 2026 Earnings Transcript

Kennametal reported strong Q3 results with sales up 22% year over year, organic sales up 19%, and adjusted EPS rising to $0.77 from $0.47, while EBITDA margin expanded to 20.8% from 17.9%. Management raised fiscal 2026 sales guidance to $2.33B-$2.35B and EPS guidance to $3.75-$4.00, but free operating cash flow fell to $18M year to date from $63M due to a surge in tungsten prices from $900 to $3,000 per metric ton and a jump in primary working capital to $819M. The company paused share repurchases amid cash pressure and pushed out some restructuring timing, even as it cited share gains in defense and infrastructure.

Analysis

KMT is in a rare spot where the same shock that is crushing cash conversion is also strengthening its competitive moat. The tungsten spike is effectively a supply-chain tax on the industry, but because KMT has better sourcing diversity and more vertically integrated processing, it can both pass through cost faster and steal share from competitors that are rationing inventory or extending lead times. The second-order effect is that a temporary commodity squeeze can create sticky account wins in defense and earthworks if KMT uses service levels and lead-time reliability to lock in procurement relationships before the market normalizes.

The market is probably underestimating how asymmetric the near-term P&L looks versus the cash flow story. Earnings can continue to look artificially strong for another quarter or two as price/raw timing flows through, while inventory value keeps absorbing cash and suppressing buybacks. That combination can support the stock on headline EPS revisions, but it also means quality-of-earnings risk rises into FY27 if tungsten stabilizes faster than management’s assumed cadence, because the timing benefit will roll off before the operating mix fully resets.

The contrarian angle is that this is not just a commodity pass-through story; it is an industrial market-share event with a limited shelf life. If management is right that a meaningful chunk of the volume gains comes from share capture rather than pure prebuy, the revenue base may reset higher even after the pricing windfall fades, which would make FY27 less of an air pocket than the street expects. But if supply constraints ease materially in China or new mine supply arrives faster, the current margin optically peaks in the next 1-2 quarters and the stock could de-rate on both EPS normalization and the return of buybacks.

Key Decisions for Investors

• Long KMT into the next 1-2 quarters on EPS revision momentum, but size it as a tactical trade rather than a core hold; upside is tied to sustained price/raw timing, while downside is a sharp cash-flow disappointment if tungsten stabilizes sooner than expected.
• Buy KMT Jan-2027 put spreads to express the view that FY27 cash conversion and buyback reacceleration disappoint once the timing benefit rolls off; risk/reward improves if the stock rallies on near-term margin beats.
• Pair trade: long KMT / short a more exposed industrial tooling peer with weaker pricing power and less supply-chain control; thesis is that KMT should win share while competitors absorb margin pressure from the tungsten squeeze.
• If already long KMT, hedge with a trailing stop or call overwrite into the Q4 print, because the stock can gap up on guidance but is vulnerable to any commentary that softens the implied price/raw benefit beyond FY26.