Tuesday, August 16, 2011

This Company Bores Me, So I Bought Its Stock

OK, it's not quite as simple as the headline might suggest. But there's something to that whole idea of buying boring companies.
I'd had my eye on Kennametal (KMT), an industrial tool maker based in Latrobe, Pa, the town once famous for its green-bottled and often skunky Rolling Rock beer.
I learned about this company through a Motley Fool investing newsletter, which recommended it back in the spring.

Kennametal makes metalworking tools and drill bits for mining operations.
It also makes tools that help make medical devices such as heart valves and replacement joints. And it makes the metal in machines that cut your receipts at gas pumps and registers.
I liked the story. It's a bit of a turnaround play. Despite being one of the leaders in its industry, Kennametal struggled through 2009 and into 2010. Earnings per share had fallen from a pre-2008 crash $2.49 to a meager 22 cents  It put together a company restructuring plan to get itself back to better profitability.
It's come along well.

Late last month, it reported a strong quarter. Earnings rang in at $1.11 per share. Same quarter last year, it earned just 61 cents a share. That's nice earning growth.
Revenue growth was impressive too. That's important for a story like this. I don't want to invest in a company just because it slashed its workforce to pad earnings when times are still tough. I want it to be growing into the future.
Kennametal's sales were up 28 percent over last year.
The company expects that growth to continue into 2012.
That fits the bill.

Yet, the reaction to its recent earnings report was tepid at best. In fact, the stock dropped from about $42 to under $39 over the next couple days.
I guess you'll have that with boring stocks like Kennametal.
I took the opportunity to make my first buy.
Of course, all hell broke loose in the markets very shortly after.
I used that as an opportunity to add shares and reduce my average cost when the stock dropped to around $32. With my average cost, I'm buying a pretty good company at a multiple of 13.

But there's more to Kennametal's draw, at least for me.
It's a company right here in my home state of Pa. It's from a town that produced one of the state's most iconic products since Prohibition. (Rolling Rock is now a Labatt product.)
I'd also worked in a metal factory in my younger days. Not quite the type of work Kennametal does, but still, there's something nice about owning companies that produce goods like that.

My portfolio down 8.1% on the year. See it here.

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