Kennametal (KMT) is back in focus after reporting third quarter sales of US$592.59 million and net income of US$58.23 million, alongside raised full year sales guidance and an affirmed quarterly dividend.

The strong quarterly update came after a sharp one-day share price drop of about 13% and a 12% decline over the past 90 days, even though year to date the share price return is up around 25% and the 1-year total shareholder return is close to 70%. This suggests longer term momentum remains positive despite a recent pullback.

If Kennametal's moves have you thinking about where else growth and infrastructure demand could show up, it might be worth scanning for opportunities in related industrial supply chains via 36 power grid technology and infrastructure stocks

With earnings running ahead of expectations, a raised full year outlook and a share price that has recently pulled back, you have to ask: is Kennametal still undervalued, or is the market already pricing in future growth?

Most Popular Narrative: 3.9% Undervalued

With Kennametal last closing at $36.10 against a narrative fair value of $37.57, the current setup leans slightly in favor of the valuation story built around its future cash flows and earnings power.

The company is actively rightsizing capacity and executing structural cost reductions (including plant closures and workforce optimization), which are projected to produce $125 million in run-rate savings by fiscal 2028, supporting significant net margin improvement as volume returns.

The fair value hinges on how that margin story plays out over time. Revenue, earnings and the future P/E all have to line up. Curious which set of long term assumptions keeps that fair value just above today’s price and why analysts are relatively aligned on it.

According to the most widely followed narrative, the current value estimate uses an 8.87% discount rate and a detailed set of forecasts for revenue growth, profit margins and earnings in the years ahead, then compares those cash flows to a future P/E level that is lower than where the wider US Machinery group is modeled.

Result: Fair Value of $37.57 (UNDERVALUED)

However, there is still a risk that prolonged weakness in key end markets and unproven cost savings could cap margins and challenge the current valuation story.

Another Angle: Cash Flows Paint A Tougher Picture

While the analyst narrative points to a fair value of $37.57 and a small 3.9% discount to that level, the Simply Wall St DCF model is far less generous. On that cash flow view, Kennametal's fair value sits at $22.84, which would leave the current $36.10 price looking expensive rather than cheap.

When two frameworks disagree this sharply, it puts the focus squarely on your own confidence in the revenue, margin and P/E assumptions that sit behind each number.

Simply Wall St performs a discounted cash flow (DCF) on every stock in the world every day (check out Kennametal for example). We show the entire calculation in full. You can track the result in your watchlist or portfolio and be alerted when this changes, or use our stock screener to discover 49 high quality undervalued stocks. If you save a screener we even alert you when new companies match - so you never miss a potential opportunity.

Next Steps

With that mix of optimism and concern in mind, do not sit on the sidelines. Review the data for yourself and weigh both sides through 4 key rewards and 1 important warning sign

Looking for more investment ideas?

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• Spot potential mispricings early by scanning for 49 high quality undervalued stocks that combine solid fundamentals with room for the market to reassess expectations.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.