Jefferies downgrades Kennametal stock rating on valuation By Investing.com

Jefferies downgraded Kennametal (KMT) to Hold from Buy and lifted its price target to $47.50, implying about 10% upside from the current $43.27 share price. The firm said tungsten price tailwinds have already been largely re-rated into the stock, though it still expects roughly $2.45/share of fiscal 2026 benefit and close to $3/share through the first nine months of fiscal 2027. Kennametal also recently beat fiscal Q3 2026 expectations with EPS of $0.77 versus $0.65 consensus and revenue of $593 million versus $568 million expected.

Analysis

The key issue is that KMT is transitioning from an earnings revision story to a multiple-compression risk story. When a stock has already re-rated on commodity leverage, the next leg is usually capped unless the underlying volume cycle broadens enough to support the higher base; here, that means the market will start focusing less on near-term tungsten translation and more on whether end-market industrial demand can sustain margins once the raw-material tailwind fades. That makes the current setup more vulnerable to a “good news, no upside” response than a typical cyclical turnaround.

The second-order winner may be the tungsten supply chain rather than KMT itself: upstream pricing power has likely shifted to miners, processors, and any constrained suppliers with indexed contracts, while downstream users in cutting tools, wear parts, and precision machining face a lagged cost shock once pass-through resets. If industrial green shoots remain shallow, KMT could become a temporary beneficiary of inventory restocking rather than a durable beneficiary of end-demand improvement, which would flatten earnings momentum by late next fiscal year.

The contrarian read is that the market may be overestimating how much of the current EPS support is repeatable. Commodity-driven earnings boosts often look sticky for one to two quarters longer than they actually are because consensus anchors on spot prices, but valuation usually anticipates normalization well before the P&L does. If tungsten rolls over or contract resets occur sooner than expected, the downside is not just lower estimates; it is a de-rating back toward a mid-cycle industrial multiple while the stock is still priced near cycle highs.

Catalysts are asymmetric over the next 2-6 months: another beat and raise likely has limited stock response unless order growth improves, while any sign of slowing industrial demand or softening tungsten pricing could trigger a sharper reset because positioning is already crowded around the commodity tailwind. The best risk/reward is likely not outright long KMT here, but a relative-value expression versus a higher-quality industrial with less commodity dependence.

Key Decisions for Investors

• Avoid initiating new outright longs in KMT here; use strength to trim or fade into the next 1-2 earnings prints, as upside from further estimate revisions looks capped while downside from commodity normalization is delayed but material.
• Pair trade: short KMT vs long a higher-quality industrial with less commodity beta over the next 3-6 months; the thesis is that KMT’s multiple is more exposed to tungsten mean reversion than peers with broader organic demand drivers.
• If already long KMT, consider protecting gains with 1-2 quarter put spreads targeting the post-commodity-normalization window in late fiscal 2027; this keeps participation in any residual upside while defining risk around valuation compression.
• Look for a better entry only if the stock de-rates 15-20% on any tungsten pullback or if organic growth inflects enough to justify mid-cycle earnings power beyond the commodity tailwind.
• For event-driven traders, watch the next guidance update closely: a beat without higher volume growth is a sell-the-news setup, while any commentary implying tungsten pass-through is ending earlier than expected is a short trigger.