As an investor its worth striving to ensure your overall portfolio beats the market average.  But the risk of stock picking is that you will likely buy under-performing companies.  We regret to report that long term Kennametal Inc. (NYSE:KMT) shareholders have had that experience, with the share price dropping 39% in three years, versus a market return of about 23%.    

It's worthwhile assessing if the company's economics have been moving in lockstep with these underwhelming shareholder returns, or if there is some disparity between the two. So let's do just that.  

In his essay The Superinvestors of Graham-and-Doddsville Warren Buffett described how share prices do not always rationally reflect the value of a business.  One flawed but reasonable way to assess how sentiment around a company has changed is to compare the earnings per share (EPS) with the share price.

Kennametal became profitable within the last five years.    That would generally be considered a positive, so we are surprised to see the share price is down.  So given the share price is down it's worth checking some other metrics too.  

Revenue is actually up 6.3% over the three years, so the share price drop doesn't seem to hinge on revenue, either.  It's probably worth investigating Kennametal further; while we may be missing something on this analysis, there might also be an opportunity.    

The company's revenue and earnings (over time) are depicted in the image below (click to see the exact numbers).

NYSE:KMT Earnings and Revenue Growth March 30th 2024

It is of course excellent to see how Kennametal has grown profits over the years, but the future is more important for shareholders.  This free interactive report on Kennametal's balance sheet strength is a great place to start, if you want to investigate the stock further.  

What About Dividends?

When looking at investment returns, it is important to consider the difference between total shareholder return (TSR) and share price return. The TSR is a return calculation that accounts for the value of cash dividends (assuming that any dividend received was reinvested) and the calculated value of any discounted capital raisings and spin-offs.  It's fair to say that the TSR gives a more complete picture for stocks that pay a dividend.  We note that for Kennametal the TSR over the last 3 years was -33%, which is better than the share price return mentioned above.  This is largely a result of its dividend payments!

A Different Perspective

Investors in Kennametal had a tough year, with a total loss of 6.7% (including dividends), against a market gain of about 29%.  Even the share prices of good stocks drop sometimes, but we want to see improvements in the fundamental metrics of a business, before getting too interested.    Unfortunately, longer term shareholders are suffering worse, given the loss of 5% doled out over the last five years.  We'd need to see some sustained improvements in the key metrics before we could muster much enthusiasm.       Before spending more time on Kennametal it might be wise to click here to see if insiders have been buying or selling shares.

But note: Kennametal may not be the best stock to buy. So take a peek at this free list of interesting companies with past earnings growth (and further growth forecast).

Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on American exchanges.

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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.