Looks Like Buffett's After Kennametal

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Includes: BRK.A, KMT
by: Shlomi Cohen

Warren Buffett has just been in Israel on a visit to get a close-up look at the big acquisition he made back in May, by remote control, through his investment company Berkshire Hathaway Inc. (NYSE:BRKA), when it acquired 80% of the premier cutting tool company Iscar. As I see it, Buffett, who recently turned 75, and his right hand man Charles T. Munger, who turned 80 two years ago, did not come to Israel at their advanced age for cocktail parties and photo opportunities with our political leadership, which has not had many reasons to be cheerful recently.

I think that Buffett and Munger came to Tefen Industrial Zone for their next big acquisition. This, actually, will not be here but outside of Israel probably in the US, since I believe that Buffett and Munger are about to give Eitan Wertheimer the green light for a mega-acquisition that will make Iscar the gorilla of its sector. Hints about this were circulated during the celebrations in Omaha, Nebraska back in May, but Buffett and Munger will have probably given Wertheimer their final approval at yesterday’s board meeting in Tefen.

I am now adding Kennametal Inc. (NYSE: KMT), Iscar’s US rival, to my portfolio. Kennametal may soon become one of Buffett and Wertheimer’s acquisition targets and even if I am wrong in this regard, it is still a good investment on its own, in a field outside the classic high-tech industries. Kennametal belongs to the same basic but progressive tool cutting industry as Iscar with fairly low multiples and very attractive values, just the type Buffet likes.

Kennametal opened trading Monday at $56, reflecting a market cap of $2.2 billion, after the stock gained 6% last week. The company has reiterated its earnings guidance for the year ending June 30, 2007, ahead of the upcoming meeting with analysts today. In addition, investment bank Wachovia Corp. (NYSE: WB) began covering Kennametal last Friday with a “Buy” rating.

Wachovia says that the company is in the process of selling assets that do not form part of its core business, and that it is focusing on growth sectors with high profitability rates, reducing its dependence on the US economy and acquiring new complementary activities. Wachovia has set a target price for Kennametal of $62-65 for the coming year, with earnings per share of $4.4 and sales likely to reach $2.3 billion, half of which will be outside the US. This will reduce its critical dependence on US economic growth. The company has a sales multiple of 1 and a profit multiple of 13 for the coming year, with analysts predicting that the company will post $5.1 million profit for the year ending June 30, 2008, an increase of more than 15% over 2007.

Iscar’s financial results are unknown, but Buffet is rumored to have acquired the company at a profit multiple that is substantially lower than that of Kennametal. On the other hand, Wertheimer admitted that he did not “shop around” for the optimal price, but intentionally sold the company for less because he wanted Buffett as a partner. Kennametal is not only Iscar’s competitor but also its neighbor, since it acquired Kibbutz Hanita’s small cutting tool company in the border town of Shlomi near Tefen a few years ago. The company is now a local Kennametal branch.

KMT 1-yr Chart


Published originally by Globes [online], Israel business news - www.globes.co.il © Copyright of Globes Publisher Itonut (1983) Ltd. 2006. Republished on Seeking Alpha with full permission.